Research
Please note that our Weekly Insights will take a hiatus over the summer, returning late August.
Last week, the “Trump Trade” dominated markets. Investors focused on beneficiaries of a more inward-looking America and winners from potential deregulation, while big-tech and semiconductors were punished. In turn, a strong rotation played out in favour small-cap and value stocks.
To illustrate, the Russell 2000 small cap index enjoyed five straight gains of 1% or more for the first time since 1979. The reasons are twofold. Firstly, market participants imagine that tariffs and regulations under a Trump presidency will protect smaller domestic companies. Secondly, small firms will be key beneficiaries of lower rates, having a much higher percentage of floating rate debt.
Meanwhile, semiconductors had their worst day since 2020, and the Nasdaq had its worst since 2022, on possible export restrictions from the Biden administration and geopolitical comments from Donald Trump.
But on Sunday, the election was plunged into unchartered territory after Joe Biden announced that he would be dropping out of the race, making him the first President in over fifty years not to seek re-election. He endorsed Kamala Harris, his Vice President, to become the Democratic nominee. If selected, she will be up against Trump, who accepted his nomination at the Republican convention last week, after surviving an assassination attempt. Harris could still be challenged from others within the Democratic party but the fact that the Democratic National Convention begins on 19th August leaves them very little time to do so. Prediction markets show Harris as the clear favourite to win the Democratic nomination, however, she is starting with an approval rating below 39% — the same as Biden’s.
The market is preparing for greater uncertainty in the weeks ahead, with a Trump presidency no longer perceived as a foregone conclusion. Harris could potentially motivate Democratic supporters who were not energized by the prospect of another Biden term, to go out and vote, and her chances would be further boosted if she selects a running mate that is well-received in key swing States. Donations to the Democratic party surged after Biden’s withdrawal.
From a market perspective, it is still difficult to draw firm conclusions, at least until we know more about how Harris intends to differentiate herself from Biden. Having been his Vice Chair, major policy changes are not anticipated.
As of now, the market reaction has been fairly muted. European stocks have begun to recover following their worst week of the year (Europe’s export-oriented economy would be particularly vulnerable to Trump’s proposed tariff policy of 10% across the board). US futures also signaled gains early on Monday. The dollar softened, the Mexican peso strengthened and the curve steepening trade has unwound a little.
The ongoing earnings season, as well as the outlook for the Fed’s monetary policy remain important drivers for the market while we await more concrete information. The Fed is now in its self-imposed blackout period ahead of its monetary policy meeting on July 30-31. Friday’s PCE inflation reading, the Fed’s preferred measure, will be important in guiding sentiment.
Weekly Roundup
ECB leaves rates unchanged
On Thursday, the ECB left its key interest rates unchanged, as was widely expected. Amid sticky services inflation, Christine Lagarde, reiterated “no pre-commitment” to future cuts, but the market still places around an 80% probability on another 25bp cut in September. Before that meeting, we will have two PMI readings and two inflation prints, which will be important in order for the ECB to ascertain how it is progressing in its quest to bring inflation back to 2%.
In other news, the ECB’s Q2 bank lending survey showed that euro area banks saw a small further tightening of their credit standards for loans or credit lines to enterprises. Overall credit terms and conditions eased for housing loans, while they saw a small tightening for consumer credit.
Firms’ net demand for loans declined further in the second quarter of 2024 (net percentage of -7%), although by substantially less than in the previous quarter. Household loan demand expanded for the first time in two years amid easing mortgage conditions and optimism about the housing market.
Friendly macro data from the US
Data released by the Federal Reserve on Wednesday showed that US Industrial Production rose 1.6% YoY in June, the biggest gain since November 2022, and up from 0.3% in May. Utilities output soared 7.9% (most likely due to unseasonably hot weather boosting electricity demand for air conditioning), manufacturing increased 1.1% and mining declined 0.6%. Over Q2 as a whole, Industrial Production was +4.3% at an annual rate, following -2.1% in Q1. Manufacturing output rose +3.4% versus -1.3% in Q1.
Higher borrowing costs and tighter credit conditions have posed challenges for the industry, curbing demand for goods and making capital investment challenging. With the Fed now slowly becoming more dovish, there is hope that factory activity could pick up further towards the end of the year. That said, we should note that manufacturing only accounts for 10.4% of the economy, with consumption being the real lynchpin of support.
On that front, retail sales in the US stalled from May through June (vs. economist expectations of -0.3%), as a drop in receipts at auto dealerships (due to a cyberattack that disrupted operations at dealerships across the US), was offset by broad strength elsewhere. Sales in May were also revised higher (0.3% from 0.1%).
Digging into the June details, sales rose for nonstore retailers (1.9%), building materials and garden equipment (1.4%), health and personal care (0.9%), clothing (0.6%), furniture (0.6%), electronics and appliances (0.4%), general merchandise stores (0.4%), miscellaneous store retailers (0.3%), food services and drinking places (0.3%), and food and beverages stores (0.1%). Sales excluding food services, auto dealers, building materials stores and gasoline stations, which are used to calculate GDP, were up 0.9%, the largest increase since April 2023.
Overall, we can conclude that the print brings a display of consumer resilience that enhances prospects for robust Q2 growth. Early in Q3, data should be bolstered by back-to-school shopping, as well as Amazon Prime days which took place across July 16-17. Sales for the event were up 12% year-on-year, indicating that consumer spending is still strong, but that consumers are becoming more strategic in their buying behaviours, seeking out promotions.
New home construction also picked up in June, largely thanks to the volatile multifamily segment. Overall, housing starts rose 3% MoM, but multifamily homes saw a whopping 22% rise. Single family housing starts fell 2.2% on the month but looking at the year-on-year figure of +5.4%, suggests demand remains intact.
The grit in the oyster last week was Weekly Jobless claims data which rose by the largest amount since early May (+20,000 to 243,000). This is worth the watching; however, we have to factor in summer auto plant shutdowns while they retool for new models, and Hurricane Beryl. For now, the data seems to remain consistent with cooling labour market characterised by a slower pace of hiring rather than spiking layoffs.
From the political sphere…
European Commission President Ursula von der Leyen was confirmed for a second five-year term in a secret ballot. 401 MEPs voted in favour, which was a good notch above the 360 required, giving her a much bigger margin than in 2019, when she secured just 9 more votes than she needed. The next step is for new Commissioners to be appointed, and the European Parliament will subsequently vote to approve the entire Commission.
Zooming in on France, the country’s national auditor, the Cour des Comptes, said that the country is “dangerously exposed” to a fresh economic shock, given its rising debt pile. The budget deficit reached EUR 154bn, or 5.5%, of GDP last year, 0.7 percentage points worse than 2022 and 0.6 points higher than targeted by finance minister Bruno Le Maire. The body advised that the country takes action to honour its Eurozone commitments on debt containment.
China’s central bank cuts key short-term policy rate
For the first time in almost 12 months, the PBoC lowered its 7-day reverse repo rate by 10 basis points to 1.7%, in a bid to increase financial support to the economy. Immediately after the news, onshore Chinese stocks lost over 1%, with investors appearing underwhelmed. The rate cut, nor the Third Plenum, offered the strong, sweeping support that markets are after.
Economic calendar for the week ahead
Monday – China Loan Prime Rate. Germany Retail Sales.
Tuesday – Eurozone Consumer Confidence (Flash). US Existing Home Sales.
Wednesday – Japan, Eurozone, US, UK Flash PMI. Germany Gfk Consumer Confidence. Bank of Canada Monetary Policy Meeting. US New Home Sales and Building Permits.
Thursday – Germany IFO Business Climate. Eurozone M3 Money Supply. US Durable Goods orders and GDP Growth (Q2, Advanced).
Friday – France Consumer Confidence. Spain Retail Sales. Italy Business and Consumer Confidence. US PCE Inflation, Personal Income and Spending, Michigan Consumer Sentiment (Final).
Saturday – China Industrial Profits