It’s been a strong end to the week for European markets after EU inflation came in slightly below forecasts, increasing less than expected in June.
Europe
Core CPI still increased in June but by less than expected, rising by 5.4% from 5.3% in May but by less than the 5.5% that had been predicted. A strong US session is also helping to pull European markets to the highs of the weak and helping to pull yields off their highs of the day, although UK 2-year gilt yields are still generating scorch marks of their own.
It’s still been a strong quarter for the DAX, up for the third quarter in a row, closing above 16,000, and up 16% year to date, however the FTSE 100 has disappointed, as it looks to try and finish the month higher, but well down on the gains it put in on Q1. This is largely due to weakness in basic resources, energy, and banks this quarter, which have seen it diverge from its European peers, largely due to weakness in the mining sector, which has underperformed due to weak Chinese demand.
Today’s gainers have been in the banking sector, with Lloyds Banking Group, NatWest, and Barclays seeing a strong session after a better-than-expected Nationwide house price survey, and Lloyds Business Barometer survey in June, which rose to a 13-month high.
While we’ve seen a strong end to this month, the damage has been done in housing where we’ve seen hefty monthly losses with Persimmon down over 14%, and Barratt Developments and Taylor Wimpey down in the region of 10%, as the impact of higher rates weighed on the outlook on future demand.
US
US markets look set to finish the quarter very much on the up, with the S&P500 posting its third successive quarter of gains, after US core PCE inflation slipped back to 4.6% in May, and personal spending slowed to 0.2%.
Nike's Q4 results haven’t been able to offer encouragement to a share price that has fallen back this year, and has slipped back today. The China recovery story was expected to add a boost to the second half of this year, and has remained reasonably resilient after a positive Q3. While China demand appears to be holding up, there are concerns that US demand may start to slow, despite Q4 revenues beating expectations, coming in at $12.83bn. Profits, on the other hand, fell short of expectations, due to an increase in costs.
Annual revenues came in at $51.2bn while margins slipped by 1.4%. On the outlook the company was measured in its forecasts with flat revenue expected for Q1, well below expectations of a 5.8% improvement. Nike is also having problems reducing its inventory levels which are higher than they should be due to lower demand.
Apple shares have moved to a new record high above $190 and a new record valuation of over $3tn market cap.
There was welcome news for Constellation Brands after Q1 sales came in at $2.52bn, beating expectations as did profits, which came in at $2.91c a share. The sales numbers were helped by a solid increase in beer sales with Modelo Special, overtaking Bud Light as the top selling beer in the US in the wake of the social media backlash over the recent Budweiser branding campaign which used Dylan Mulvaney. There was some disappointment over weaker wine and spirits sales, which appears to be weighing on the share price.
FX
The pound is enjoying a good day after business confidence in June rose to its highest levels since February 2022, and house prices in June showed an unexpected increase of 0.1%. The latest Q1 GDP revisions came in unchanged.
The US dollar has also slipped towards its lows of the day after core PCE inflation softened slightly in May to 4.6%, while yields also slipped off their intraday highs. While this could be viewed as encouraging news, it doesn’t really tell us too much given that this annual number has remained steady at between 4.6% and 4.7% since last November. If there are deflationary forces at work, they aren’t being reflected in core prices yet, which is a little surprising 15 months on from the first rate hike, back in March last year. It certainly doesn’t change the calculus behind a 25bps rate rise in July from the Fed, and perhaps helps explain why FOMC members are concerned about why inflation is so sticky.
The Japanese yen retreated from the 145.00 level
Commodities
Crude oil prices have edged up to a one-week high, and a weekly gain at the end of a quarter which has seen prices fall for the 4th quarter in a succession, although Brent prices have managed to stay above their March lows at $70 a barrel. As we look ahead to the second half of the year, there is optimism that the resilience in the US economy and new stimulus measures from China will help boost prices back towards $80 a barrel. This might mean that the drag effects of lower energy prices may well start to diminish in the short term.
Gold prices are slightly firmer albeit just above their 3-month lows from yesterday, as a slightly softer US dollar has helped pull prices back above $1,900 an ounce. Prices are still on course for their third successive weekly decline, and first quarterly decline since Q3 last year.
Volatility
US banks found support on Thursday morning after all 23 of the largest lenders in the country passed the Federal Reserve’s stress test. The resulting 3.5% gain for JP Morgan’s stock was sufficient to leave the bank as one of the most active share prices, with one day volatility coming in at 41.3% against 28.32% for the month.
US natural gas found itself as the most active commodity, bouncing off a one week low in response to a smaller than expected build in the EIA gas stocks report. The initial reaction appeared to be overdone however with the underlying ending around 1% higher despite having traded in a 5% range. One day vol stood at 67.07% against 57.57% for the month.
Sugar prices continued their run lower with the raw contract posting its ninth successive day of losses on Thursday and testing lows for the quarter as a result. Continued strong production news out of Brazil remains a driving force here, although signs of some bargain hunting were in evidence ahead of the close. One day vol printed 54.6% against 45.73% for the month.
And in fiat currencies it was the greenback that stood out during the session. Hotter than expected final readings on Q1 GDP offered up some support for the US dollar, although this then proved to be rather short lived. One day vol on Euro/USD stood at 7.38% against 6.36% for the month.
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