Weekly market summary
The results of the FOMC interest rate meeting last week were basically in line with expectations, without too many surprises. The meeting successfully balanced the positions of hawks and doves. The latest data continue to show that inflation is falling while the economy is recovering, which supports the Fed's dovish stance. The market generally believes that interest rate hikes are over; concerns about the Bank of Japan's unexpected turn have eased, and the YCC has been adjusted to a dovish tone; market participants in developed countries have accelerated risk-on; China's stock market has benefited from the support of the "policy bottom", and the weekly gains of the three major indexes are all above 2%, and have risen for two consecutive weeks.
In terms of industry performance, cyclical stocks have stronger momentum than defensive stocks, showing a risk-on state:
As both European and American central banks raised interest rates, bond yields in major developed countries generally rose last week. After the rate hike was implemented, the 10-year U.S. Treasury bond yield once again broke through the 4% mark, fell slightly on Friday, and finally closed at 3.97%, much higher than the previous week's closing price of 3.85%.
The overall market value of the digital currency market fell slightly by 1.1% to $1,232 billion last week (according to Coingecko):
The 7-day decline list of the top 100 cryptocurrencies by market value. The Curve vulnerability incident on Sunday caused a massive sell-off of CRV tokens:
U.S. stock investors' enthusiasm for cryptocurrencies has cooled slightly. The discount of GBTC has widened from 26% to 30%, and the discount of ETHE has widened from 38% to 41%. Coinbase's stock price fell 5.6% throughout the week:
On-chain stablecoins saw large outflows for the second consecutive week (-$500 million):
The balance of stablecoins in centralized exchanges (CEX) rose slightly by $244 million, the largest increase in five weeks, but overall there has been little change in the past five weeks:
Review of important economic events of the week
GDP exceeded expectations, with investment as the main support
In the second quarter, the US GDP grew by 2.4%, which was better than the first quarter and better than market expectations (1.8%). From the perspective of sub-sectors:
Real consumer spending increased 1.6%, indicating a slight cooling in consumption. Spending on goods slowed to 0.7% last quarter from 6.0% in the first quarter. The slowdown in consumer spending largely reflected a cooling in purchases of big-ticket items, much of which was due to falling auto prices, after Americans rushed to buy vehicles earlier in the year as auto dealers were able to restock their inventories. Spending on services slowed to 2.1% from 3.2% in the previous quarter, driven primarily by utilities, health care (outpatient and nursing homes), financial services, and air travel.
Business fixed investment spending increased 7.7%, well above the 0.6% increase in the first quarter and the fastest expansion since the first quarter of 2022.
Construction spending rose 9.7%, with a long-standing shortage of existing homes still boosting new construction activity.
The Fed raises rates again
As expected, the Fed voted unanimously last week to raise the target range for the federal funds rate to 5.25%-5.5%. The post-meeting statement was virtually unchanged and still contained a bias towards further tightening. Chairman Powell wanted to emphasize that policy is data dependent and no decision has been made on any further meetings. Regarding September, he said that the CPI, wage reports and an ECI report for the next two months will determine the outcome of that meeting. If the data supports it, another rate hike in September is possible. Nevertheless, the market generally expects this to be the last move of the Fed in this round of rate hikes.
Consumption continues to show resilience + inflation eases
Consumer spending was fairly strong in June, with PCE inflation cooling more than expected.
The US PCE (Personal Consumption Expenditures) price index in June fell from 3.8% in May to 3%, in line with expectations; it increased by 0.2% month-on-month; the Fed's favorite inflation indicator - the core PCE price index excluding food and energy - fell from 4.6% in May to 4.1% year-on-year, slightly lower than the expected 4.2%; it increased by 0.2% month-on-month, with expectations and previous values of 0.2% and 0.3% respectively. The slowdown in core inflation was mainly due to lower housing costs, lower used car prices and lower airfares.
At the same time, the US labor cost index recorded +1% year-on-year in the second quarter, lower than the expected 1.10% and the previous value of 1.2%, the slowest pace in two years, indicating a further cooling of wage growth.
The University of Michigan's July consumer sentiment jumped to its highest level since October 2021:
It can be seen that while inflation in the United States is slowing, consumer spending remains strong and wage growth is also slowing, which naturally makes the market bet that the Federal Reserve can curb inflation without causing an economic recession.
Unemployment slows
Initial claims for unemployment benefits fell to a seasonally adjusted 221,000 in the week ended Saturday from 228,000 in the prior week. That was the lowest level since February and suggests the job market continues to be hot.
More US companies' earnings beat expectations
51% of S&P 500 companies reported Q2 2023 earnings last week. Of those companies, 80% beat EPS estimates, which is higher than the 5-year average of 77% and the 10-year average of 73%. However, companies reported earnings that beat estimates by 5.9%, which is lower than the 5-year average of 8.4% and lower than the 10-year average of 6.4%.
Over the past week, positive revenue surprises reported by companies in multiple sectors (led by the Consumer Discretionary, Industrial and Communication Services sectors) have boosted overall revenue growth for S&P 500 companies. Since June 30, positive revenue surprises reported by companies in the index across multiple sectors (led by the Consumer Discretionary and Industrial sectors) have been partially offset by downward revisions to revenue expectations for companies in the Energy sector.
BOJ is ambiguous about exiting ultra-loose monetary policy
On Friday, the Bank of Japan's unexpected move caused turmoil in global markets. The market had different interpretations of whether the Bank of Japan was dovish or hawkish. The yen and Japanese stocks fluctuated sharply, affecting most financial assets.
From the perspective of the government bond yield curve control policy YCC, the Bank of Japan did not directly adjust the target interest rate range, but by adding the wording of "more flexible control" and purchasing a certain amount of 10-year government bonds at an interest rate of 1.0% in fixed-rate operations, the market was made to believe but not fully believe that the "new upper limit" of YCC has become 1%. This is a rather interesting and ambiguous policy approach, which is indeed very Japanese.
But the Bank of Japan lowered its median CPI forecast for fiscal 2024 to 1.9% from 2% in April, below its 2% target rate, and slightly expanded the upper limit of its government bond purchases, adding evidence to the dovish side.
Eventually, the policy uncertainty of the Bank of Japan was digested, and USDJPY rose back to the high point of the day before the policy was announced. The turning point of the yen exchange rate that the market expected did not appear. The 10-year Japanese government bond yield was fixed at 0.56%, failing to reach the 1% upper limit. The U.S. Treasury yield, which was once boosted by the Bank of Japan, also gave up some of its gains.
The Central Political Bureau meeting brought about the "policy bottom"
China's Politburo meeting in July took a more dovish stance than expected, promising real estate easing, local debt resolution and capital market support, which could be an important turning point. The market generally expects more and more specific stimulus measures to boost economic growth.
The meeting acknowledged the challenges facing economic growth and pledged to take more forceful countercyclical measures to boost domestic demand, improve expectations and prevent risks. Specific measures include:
The demand side of real estate is loosening: relax restrictions on home purchases and support improvement demand.
Infrastructure investment growth: Accelerate the issuance and use of local government special bonds.
Continue monetary easing: further cuts in reserve requirement ratio and interest rates, as well as targeted re-lending.
Consumption incentives: focus on automobiles, electronic products and home appliances.
The meeting also pledged to take measures to resolve local government debt risks, support the development of private enterprises and platform economy, and boost confidence in the capital market.
Overall, the meeting green-lighted more stimulus policies to achieve the goal of stabilizing growth. It is expected that more policy measures will be introduced in the next 1-2 months, especially in the real estate and infrastructure sectors.
This round of rise shows that low-priced assets with the most pessimistic expectations and the most damaged fundamentals will rise first, such as real estate and financial-related chains; and then turn to industries with sustained growth in performance, such as commodities and manufacturing sub-categories.
Positions and Fund Flow
According to Deutsche Bank, stock investor positions fell this week mainly due to subjective investors reducing their positions, but they are still in the high position area (Z score 0.46, percentile 72%). Commodity positions such as oil and copper increased, US dollar positions decreased, and bond positions decreased.
The positions of subjective investors fell sharply (from the 86th percentile to the 71st percentile), and the positions of systematic strategy investors increased (from the 72nd percentile to the 76th percentile), which is consistent with the retail sentiment surveys of AAII and CNN, indicating that retail sentiment is weakening to a certain extent, but the good news is that the positions of institutional investors have begun to rise again:
Equity funds recorded strong inflows last week ($13.8 billion), driven by inflows from the United States ($9.9 billion) and emerging markets ($3.6 billion). Europe (-$1.3 billion) posted 20 consecutive weeks of outflows. There were also small redemptions in the UK (-$100 million). From an industry perspective, raw materials ($600 million) and finance ($400 million) received significant inflows. Inflows to technology ($100 million) slowed sharply, while redemptions occurred in consumer discretionary (-$400 million), energy (-$300 million) and real estate (-$300 million). Other industries have seen smaller flows.
Bond funds saw strong inflows ($11.0 billion) this week, while money market funds saw strong inflows ($40.6 billion).
Deutsche Bank's view: Strong U.S. data surprises have supported the rapid rise in stock positions, but these data surprises may have peaked. Because data surprises tend to mean revert and historically remain in a range. U.S. data surprises are currently at the top of the range, and historical patterns show that they will begin to weaken from now on.
Moreover, the US data surprise index has completely disconnected from the negative data surprises in the rest of the world. Usually the data surprises in the US and the rest of the world are highly correlated. The gap between the two is now at a record high, excluding the impact of the epidemic. Where will this gap go? It may converge in both directions.
We believe that improved data will drive higher expectations, and higher expectations will lead to a higher probability of disappointment. This logic is reasonable. This phenomenon means that the positive support for US stock sentiment may weaken. Of course, economic data surprises are only one of the many driving factors of the market. Corporate profit surprises are also an important driving force and have performed well so far.
Market sentiment
Although the stock market continues to rise, both the AAII Investor Survey and the CNN Greed/Fear Index have retreated from their highs, which is a relatively rare occurrence in history:
In terms of institutional sentiment, Goldman Sachs' sentiment index is still high, and Bank of America Merrill Lynch's sentiment index is in the neutral range, with no signs of overheating:
This week’s focus
July employment
The next big test for the market is the July nonfarm payrolls report this Friday. Job growth has been slowly decreasing, but only gradually and may not meet the expectations of Fed officials. The market expects job growth to continue to slow in July, with nonfarm payrolls expected to increase by 175,000, including 140,000 in the private sector. In addition, the June JOLTS report and the closely watched data on vacancies and quits will also be released this week.
Apple, Amazon Q2 earnings report
Apple and Amazon are the most important stocks to watch this week, along with chipmakers AMD and Qualcomm, payment companies PayPal and Block, rental platform Airbnb, trading platform Robinhood, delivery apps Uber and DoorDash, and pharmaceutical companies Moderna and Pfizer.
Apple's stock price is one of the few tech stocks that is not affected by either the economic recession or rising interest rates. Earlier this month, Apple's stock price soared to an all-time high, becoming the world's first company to reach a market value of $3 trillion. It is also worth noting that Apple is one of the few tech companies that has not announced large-scale layoffs.
The announcement comes after Google, Meta and Microsoft reported strong financial results for the June quarter, with revenue growth and profitability improving due to cost-cutting measures.
The market forecast for Apple this quarter is not overly optimistic, with sales expected to fall for the third consecutive quarter and earnings expected to be flat. Apple has been very secretive about any plans related to artificial intelligence so far, so keep an eye out for details of its AI plans to reveal their impact on market sentiment.
Amazon focuses primarily on web services revenue, which generates the bulk of the company's profits. Revenue is expected to grow 10% from last year to $21.7 billion, which would be the sixth consecutive quarter of slowing growth as businesses pull back on IT spending, and the market doesn't expect it to accelerate again until the end of 2023. The hope is that Amazon can counter weak corporate spending with new AI demand, although that may take time. Microsoft is considered ahead of Amazon, with its cloud business already handling ChatGPT work but contributing only a small amount to growth in the second quarter. Microsoft has also warned that it will need to spend money to get hardware ready for AI workloads before it can reap the rewards, and Amazon will be in the same position - watch for comments about spending and investments.
China releases measures to boost consumption
The State Council Information Office will hold a press conference on measures to restore and expand consumption on Monday afternoon. Li Chunlin, deputy director of the National Development and Reform Commission, and relevant officials from the Ministry of Industry and Information Technology, the Ministry of Commerce, the Ministry of Culture and Tourism, and the State Administration for Market Regulation will introduce the measures to restore and expand consumption.
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