By Bas Kooijman, the CEO and Asset Manager of DHF Capital SA
U.S. – Inflation Data Fuels Rate Cut Speculation
U.S. equities advanced to new heights last week, with the S&P 500 and Nasdaq Composite reaching record levels midweek before moderating slightly by Friday. Investor sentiment was largely driven by hopes that the Federal Reserve could begin cutting rates as early as September, supported by softer consumer price data. Small-cap stocks outperformed, with Russell 2000 posting its strongest relative gain since April, while the Dow Jones Industrial Average also added to the positive momentum.
The economic narrative was dominated by inflation data. July’s consumer price index showed headline inflation, easing to 0.2% month over month, down from 0.3% in June, helped by lower grocery and energy costs. However, core inflation rose to 0.3%, pushing the annual figure to 3.1% its highest since February — mainly due to services. Markets initially reacted positively, interpreting the figures as leaving enough room for the Fed to lower borrowing costs.
Later in the week, the producer price index surprised to the upside, jumping 0.9% in July versus expectations of 0.2%. This fueled concerns about underlying price pressures, particularly in services, and briefly tempered the optimism around an imminent rate cut.
Other data painted a mixed picture of consumer health. Retail sales rose 0.5% in July, with motor vehicles leading to gains, and June’s figures were revised upward. However, the University of Michigan’s consumer sentiment index dropped to 58.6, down from 61.7 in July, as households expressed heightened concerns about inflation.
Bond markets reflected these dynamics. U.S. Treasury yields steepened, with long-term yields rising after the producer price report while short-term yields fell slightly. Corporate bonds benefited from strong demand, with both investment-grade and high-yield debt generating positive returns.
Europe – Trade Relief and Economic Divergence
European equities ended the week higher as easing trade tensions and optimism around potential U.S. interest rate cuts buoyed investor confidence. The pan-European STOXX 600 gained 1.18%, supported by France’s CAC 40 and Italy’s FTSE MIB, while Germany’s DAX and the UK’s FTSE 100 also posted gains.
In the UK, the economy rebounded in June with GDP growing 0.4% after a small contraction in May. Growth in services, industrial production, and construction supported the recovery. While quarterly growth slowed to 0.3%, the pace was still above the Bank of England’s forecast, indicating resilience. The labor market showed signs of stabilizing, with payroll employment falling by just 8,000 in July compared to steeper prior declines. Unemployment remained at 4.7%, its highest since 2021, while wage growth moderated to 4.6%.
In the eurozone, industrial production declined by 1.3% in June, exceeding expectations for a smaller drop. Annual growth slowed sharply to just 0.2% compared with 3.1% in May, raising concerns about the strength of the region’s industrial base. German investor sentiment also weakened, with the ZEW Economic Sentiment Index falling to 34.7 from 52.7 in July, signaling growing unease about trade dynamics and slowing growth.
Meanwhile, Norway’s central bank kept its benchmark rate unchanged at 4.25% after cutting in June for the first time in five years. Policymakers noted that further easing remains possible if the economy continues to soften.
Asia – Growth and Trade Drive Gains
Asian markets also saw strong gains. In Japan, both the Nikkei 225 and TOPIX indexes surged to record highs, rising 3.73% and 2.76% respectively. The rally was underpinned by second-quarter GDP growth of 1.0% quarter on quarter, well above expectations of 0.4%. Exports rebounded strongly ahead of U.S. tariff deadlines, while capital investment and consumer spending held firm. This reinforced expectations that Japan’s economy remains on a steady path despite global headwinds.
Currency and bond markets responded with modest shifts. The yen strengthened slightly against the dollar, supported by speculation that the Bank of Japan may need to adjust policy sooner than expected. The yield on the 10-year Japanese government bond climbed to 1.57% from 1.49%, reflecting rising market expectations of future rate hikes.
In China, equities advanced after Beijing and Washington agreed to extend their tariff truce for another 90 days. The CSI 300 gained 2.37% and the Shanghai Composite rose 1.70%, while Hong Kong’s Hang Seng Index also moved higher. Investors welcomed the extension as it delayed steep tariff hikes and opened the door for further negotiations.
However, Chinese economic data underscored ongoing challenges. Retail sales growth slowed to 3.7% year after year in July, the weakest pace since December, while industrial output and fixed asset investment also decelerated. Producer prices fell for the 34th straight month, pointing to persistent deflationary pressures in the industrial sector.
Markets worldwide remain caught between optimism around monetary easing and caution over uneven economic data. The coming weeks are likely to be shaped by how policymakers balance inflation risks against growth concerns, with September’s Federal Reserve meeting now firmly in the spotlight.