Global Markets Ramp Out Of The Gate In Solid Start To Second Half Boosted By Oil, Tesla

Global markets have kicked off the new quarter with solid gains from Asia to Europe (as previewed last week in "The Technical Overhang Is Done, July Starts With A Bullish Eruption") while US equity futures were in the green, with sentiment getting a boost thanks to Tesla and BYD climbing on record quarterly sales. Oil rallied as Saudi Arabia and Russia extended oil supply cuts. At 7:45am ET, S&P emini  futures were flat, reversing an earlier rally, with trading activity subdued by today's half-day schedule ahead of the upcoming July 4 holiday; Nasdaq futures rose 0.2% on the back of strength from TSLA and Ai stocks; the tech is green fresh off its best-ever first half of a year. Asian stocks were broadly higher, boosted by China markets, while Europe's Stoxx 50 Index climbed 0.4% to highest intraday level since Dec. 2007, as energy stocks outperform. Treasury yields are ticking higher at the short end of the curve, and edging lower at the longer end, pushing the 2s10s inversion to a whopping 110bps. The Bloomberg dollar index strengthened slightly. Gold prices are sliding, while oil has erased early losses to climb higher. Iron ore prices have dropped substantially today, continuing a volatile few weeks.

In premarket trading, Tesla gained 6.5% while BYD climbed in Hong Kong trading, leading shares of battery suppliers also higher. Shares of electric-vehicle makers jumped in sympathy: Rivian +2.1% and Lucid +1.7%. Cryptocurrency-exposed stocks also rose in premarket trading as Bitcoin hovers above the closely watched $30,000 level for a twelfth consecutive session. Riot Platforms +0.8% (RIOT US), Marathon Digital (MARA US) +1.6%. Here are some other premarket movers:

• Fidelity National Information Services (FIS US) gains 2.5% in US premarket trading as the Financial Times reports that private equity firms, including Advent, are considering buying its majority stake in Worldpay at a valuation exceeding $15 billion. Analysts see the interest as positive for the share price of FIS.
• Shares in air taxi companies are poised to extend gains after Joby Aviation posted its best weekly climb ever as it received approval from the Federal Aviation Administration to test its electric-powered flying taxis. Joby Aviation (JOBY US) rises as much as 4.8%.

Investors are tempering expectations for stocks after an unexpectedly strong first half. While central banks have kept up their hawkish rhetoric, signs of moderating US inflation has fueled big gains across technology shares. Traders are looking to the upcoming earnings season and data such as Friday’s nonfarm payrolls for clues on the health of the economy. Markets in the US may be quieter ahead of the Independence Day holiday on Tuesday

Adding to bullish sentiment, crude prices reversed earlier losses to jump after Saudi Arabia’s state-run news agency said the country will prolong its unilateral oil production cut by one month, keeping a lid on supply even as the market is expected to tighten. Its OPEC+ ally Russia also announced fresh curbs on exports.

“Stocks have done well in the first half because a US recession didn’t happen,” said Nikolaos Panigirtzoglou, global market strategist at JPMorgan Chase & Co. Moreover, he added, the tech trade has turned into “a pain trade for institutional investors, causing them to capitulate. This first-half back drop creates vulnerabilities for the second half as it means if a US recession happens, there would be a rather abrupt market repricing.”

A report on Chinese manufacturing on Monday showed the economy is still struggling to rebound, while in Europe, Italy’s factories had their worst month since Covid-19 lockdowns in early 2020.

Also in focus this week will be US Treasury Secretary Janet Yellen’s trip to Beijing on July 6-9 as the world’s two largest economies look to mend ties after a spate of bilateral tensions.

After outperforming the S&P in the first half, the Euro Stoxx 50 Index climbed 0.4% to highest intraday level since Dec. 2007, as energy and mining shares led gains while AstraZeneca Plc led health-care shares lower as results from a high-level study of its new cancer medicine raised concern the drug might not work as well as anticipated. The Stoxx 600 is up 0.2% and on course to extend its winning streak to five sessions. Here are the most notable European movers:

• Assicurazioni Generali rises as much as 5.6% in Milan after Italy’s insurance watchdog approved a request made by Del Vecchio family holding Delfin to raise its stake in the insurer above 10%
• Dormakaba jumps as much as 6.2% after it announced a plan to cut as many as 800 additional full-time jobs. Stifel welcomes this “new and seemingly more impactful restructuring program”
• Nokia shares rise as much as 3.1%, the most since March, after the telecom equipment maker announced a new multi-year patent agreement with Apple, six months before the current contract expires
• PGS gains as much as 9.3% after it gets a “large” offshore wind farm site characterization contract in the US by a renewable energy company; project is expected to be completed by February 2024
• AstraZeneca falls as much as 6.2%, the most since November 2021, after the UK drugmaker announced fresh data from a trial for its lung cancer treatment datopotamab
• TietoEVRY drops as much as 2.9% after Handelsbanken cuts its rating on the IT services company to hold, with the broker saying that the near-term outlook is “soft” for the company amid a slowdown
• UK utilities, including Pennon and Severn Trent, remain under pressure after last week’s talk about a potential nationalization of UK Thames Water, with Citi seeing a possible value trap remaining for months
• Casino shares fall as much as 21%, extending their plunge to fresh record lows, after it said the company may be in default under its revolving credit facility by end of August at the latest

The MSCI Asia Pacific Index rose as much 1.2%, a strong start to the new quarter and half, led by advances in Chinese and Japanese benchmarks. Technology shares including Tencent and Samsung Electronics are the best-performing sub-sector on the regional gauge, which is set for its best day in about three weeks. A Hang Seng index of Chinese tech stocks jumps as much as 2.6%. Hong Kong’s Hang Seng benchmark up as much as 1.7%, Japan’s Topix +1.4%. Japan's Topix index was on course for a fresh 33-year high as confidence among the nation’s big manufacturers gained in the first improvement in almost two years

• Hang Seng and Shanghai Comp conformed to the positive mood after Chinese Caixin Manufacturing PMI topped forecasts for its second consecutive monthly expansion and the PBoC recently pledged that China will continue to provide inclusive loan support for small and micro businesses. In addition, the US confirmed that Treasury Secretary Yellen will visit China on July 6th-9th for meetings with senior Chinese officials although a Treasury official already tempered expectations and noted that no significant breakthrough was anticipated.
• Nikkei 225 was underpinned following the BoJ’s quarterly Tankan survey which mostly topped estimates and showed Japanese large manufacturers' sentiment improved for the first time in seven quarters.
• ASX 200 was positive as gains in the commodity-related sectors offset the losses in tech stocks and with encouragement from a surge in Building Approvals, although further upside was capped ahead of tomorrow’s RBA meeting with analysts near-evenly split regarding forecasts for a hike or a pause.
• Stocks in India extended record run as Asian peers rallied upon start of quarter. Index-heavy ITC surged to its all-time high while Reliance Industries posted biggest gain in more than a month.   The S&P BSE Sensex rose 0.8% to 65,205.05 in Mumbai, while the NSE Nifty 50 Index advanced 0.7%. The gauges have been trading at all-time high levels and extended their gains this year to more than 6%. Foreigners have purchased $12.2b of local shares in quarter through June, their biggest since December 2020. Reliance Industries contributed the most to the index gain, increasing 2.6%, its biggest single-day advance since May 26. Out of 30 shares in the Sensex index, 16 rose, while 14 fell. ITC gained 2.6%.
• Pakistan’s equity gauge index surged after the nation clinched an initial $3 billion loan deal from the International Monetary Fund, easing default fears.

In FX, the Bloomberg Dollar Spot Index erased an early drop to rise 0.2%, supported by the view that US interest rates may keep rising even as inflation in the country shows signs of easing.  Traders are betting on a more than 90% possibility that the Federal Reserve will raise rates by 25 basis points later this month, and see a nearly 50% chance of an additional hike by the end of the year. The euro fell as much as 0.4% to 1.0871; EUR/GBP was little changed at 0.8592. The yuan spiked in opening trading Monday, in a hint that authorities may have taken another tool back out of the box to help stabilize the under-pressure currency. The yen fell and remained this year’s worst performing Group-of-10 currency, with traders watching for any central bank intervention should the yen depreciate further. The Swiss franc is the weakest of the G10 currencies after inflation slowed more than expected, falling 0.5% versus the greenback. 

In rates, treasuries were mixed as US trading gets under way, with 2- and 5-year yields higher after reaching new multi-month highs, dragging the inverted 2s10s spread to within 0.1bp of multi-year low -110.9bp reached in March. 2-year yields remains cheaper by more than 5bp on the day as rate-hike premium continues to firm for this year. Yields out to the 10-year are cheaper on the day with long-end little changed; 2s10s is flatter by ~4bp, 5s30s by ~3bp; The 10-year yield is around 3.85% up 1.6bp vs Friday close with bunds and gilts cheaper by 1.5bp and 2bp in the sector. German yield curve twist- flattened with two-year yield up 3bps to 3.22%.

In commodities, oil prices added to earlier gains on reports Saudi Arabia would extend a voluntary output cut into August. Soon after, Russia announced it would reduce its own exports by 500K bbl/day. US crude futures rise 1.1% to trade near $71.40. Spot gold falls 0.3% to around $1,913.

Bitcoin is modestly firmer and continuing to hold firmly above the USD 30k mark with specifics light in recent trade after overnight attention on the unconfirmed social media rumours that SEC's Gensler is to resign.

Looking at the calendar of today's pre-July 4 shortened session, we get US June ISM, total vehicle sales, and May construction spending,

Market Snapshot

• S&P 500 futures little changed at 4,491.00
• MXAP up 1.3% to 165.40
• MXAPJ up 1.3% to 520.80
• Nikkei up 1.7% to 33,753.33
• Topix up 1.4% to 2,320.81
• Hang Seng Index up 2.1% to 19,306.59
• Shanghai Composite up 1.3% to 3,243.98
• Sensex up 0.7% to 65,187.92
• Australia S&P/ASX 200 up 0.6% to 7,246.12
• Kospi up 1.5% to 2,602.47
• STOXX Europe 600 up 0.2% to 463.02
• German 10Y yield little changed at 2.39%
• Euro down 0.2% to $1.0887
• Brent Futures down 0.8% to $74.82/bbl
• Gold spot down 0.3% to $1,912.77
• U.S. Dollar Index up 0.24% to 103.16

Top overnight News

• US Treasury Secretary Janet Yellen will travel to Beijing on July 6-9, becoming the second member of Joe Biden’s cabinet to head to the Chinese capital in recent weeks, as the world’s two largest economies look to mend ties after a spate of bilateral tensions.
• Investors on the hunt for higher-yielding debt can look no further than Japan where recent signs from the central bank point to short-term interest rates staying below zero for some time.
• South Korean bonds have been the standout pick in Asia for foreign investors this year and their recent decline should be seen as just another window to buy, according to market watchers
• Saudi Arabia will prolong its unilateral oil production cut by one month, keeping a lid on supply even as the market is expected to tighten. Its OPEC+ ally Russia also announced fresh curbs on exports
• Carry traders betting on emerging-market currencies have been raking up winnings this year

A more detailed look at global markets courtesy of newsquawk

Asia-Pacific stocks began the new trading month on the front foot with momentum from last Friday's rally on Wall Street and as participants digested key data releases including an improved Tankan survey and better-than-expected Chinese Caixin Manufacturing PMI. ASX 200 was positive as gains in the commodity-related sectors offset the losses in tech stocks and with encouragement from a surge in Building Approvals, although further upside was capped ahead of tomorrow’s RBA meeting with analysts near-evenly split regarding forecasts for a hike or a pause. Nikkei 225 was underpinned following the BoJ’s quarterly Tankan survey which mostly topped estimates and showed Japanese large manufacturers' sentiment improved for the first time in seven quarters. Hang Seng and Shanghai Comp conformed to the positive mood after Chinese Caixin Manufacturing PMI topped forecasts for its second consecutive monthly expansion and the PBoC recently pledged that China will continue to provide inclusive loan support for small and micro businesses. In addition, the US confirmed that Treasury Secretary Yellen will visit China on July 6th-9th for meetings with senior Chinese officials although a Treasury official already tempered expectations and noted that no significant breakthrough was anticipated.

Top Asian News

• PBoC Deputy Governor Pan Gongsheng was named as the PBoC’s Party Secretary which was suggested to likely be a prelude to becoming Governor, while PBoC Governor Yi and former Party Secretary Guo stepped down from their party roles, according to WSJ and FT.
• PBoC survey found that China’s urban residents were more willing to raise consumption in Q2 compared with Q1 and residents are hoping to increase their spending mostly on education, medical care and tourism in Q3.
• China’s MOFCOM expressed dissatisfaction regarding export controls of semiconductor products imposed by the Netherlands, while it urged the Netherlands to not hinder bilateral cooperation in the semiconductor industry and to not abuse export controls, according to Reuters.
• US Treasury said Treasury Secretary Yellen will visit China on July 6th-9th for meetings with senior Chinese officials and will underscore that targeted US actions are not intended to gain economic advantage. US senior Treasury official said the US is not seeking to decouple US and Chinese economies, while the US is looking for open communication and cooperation on global challenges. Furthermore, the official is not expecting significant breakthroughs from Yellen's visit and noted they are seeking to expand communications at a sub-cabinet level, while US concerns about Chinese actions on Micron are expected to come up broadly during Yellen's meetings, according to Reuters.
• US National Counterintelligence and Security Center warned about the risk of engaging in business with China after Beijing implemented a revised counterespionage law on July 1st.
• CIA Director Burns said the answer is not to decouple from an economy like China’s which would be foolish, while he added the answer is to sensibly de-risk and diversify by securing resilient supply chains, protecting US’s technological edge and investing in industrial capacity, according to Reuters.
• More than 50,000 were affected and nearly 7,000 were evacuated after heavy rain in China’s Hunan Province, according to China.org.cn.
• China's Commerce Ministry bans the exports of Gallium and Germanium related products, from August 1st.

European bourses are firmer across the board, Euro Stoxx 50 +0.4%, after a modestly supportive open given Friday's Wall St. tailwind and APAC strength on this and data. As such, sectors primarily reside in the green with Basic Resources gaining on APAC strength while Autos draw focus after Tesla's record Q2 deliveries, TSLA +6.2% in pre-market.
Stateside, futures are ticking higher but yet to deviate significantly from the unchanged mark in thin pre-holiday trade though the docket features ISM PMI; ES U/C. Japan is said to be leaning towards softer AI rules compared to the EU, according to an official cited by Reuters; goal is to work out an AI approach by year-end with rules that align more with the US. EU Industry Chief Breton says EU has similar economic concerns to Japan and discussed a lot about AI in talks in Tokyo.

Top European News

• Financial advisers warned that steps by banks and building societies to help UK borrowers cut their monthly mortgage payments risk storing up financial trouble in later life as they face a higher total interest bill and lower income in retirement, according to FT.
• French President Macron postponed his state visit to Germany amid unrest in France and met ministers to discuss a response to the unrest, while he asked his ministers to continue mobilising until complete calm is restored. It was also reported early on Sunday that the arrests in France overnight had increased to 719 and that the Paris suburb mayor’s home was attacked using a burning car.
• Foreign buyers are reportedly driving up demand and prices of real estate in Spain with buyers, especially from the US and northern Europe snapping up homes on Spain’s southern coast, according to Bloomberg.
• Germany's VDMA says German engineering orders in May -10% Y/Y (domestic +9%; Foreign -18%); May-May orders -12% Y/Y.
• German Finance Ministry record budget of EUR 51.8bln planned in defence for 2024 and EUR 19.2bln outflows from special funds, via Reuters citing sources.

FX

• Buck recovers following post-PCE and Chicago PMI setbacks as DXY bounces from 102.860 to 103.270.
• Franc flounders as Swiss CPI misses consensus marginally, but headline slows to 1.7% y/y from 2.2% previously, USD/CHF tops 0.9000 from sub-0.8950 low.
• Euro undermined by mixed to weaker EZ PMIs, with EUR/USD losing 1.0900+ status amidst a decent spread of expiry interest.
• Yen weakens as UST/JGB differentials widen and regardless of better than forecast Japanese Tankan survey, USD/JPY above 144.50 within 144.23-88 range.
• Aussie defensive ahead of RBA as analysts are split between another 25 bp hike and pause, AUD/USD pivots 0.6650 and AUD/NZD cross retreats through 1.0850 regardless of booming building approvals.
• PBoC set USD/CNY mid-point at 7.2157 vs exp. 7.2464 (prev. 7.2258)
• Czech Central Bank Governor Michl said they are not considering cutting rates and will likely get inflation to below 10% in the next two months, while he added that inflation can be more persistent than they think and they would have to raise rates if demand was to revive, according to Pravo.

Fixed Income

• Bonds choppy at the start of the new month in NA holiday-thinned volumes, EGBs mostly firmer amidst mixed EZ manufacturing PMIs and weak German VDMA engineering orders as Bunds hold within 134.14-133.62 range.
• Gilts fade from 95.55 to 95.10 as upward tweak to final UK manufacturing PMIs outweighs cooler Citi/YouGov inflation expectations.
• T-note depressed between 112-06/111-29 confines after big block sale and ahead of US PMI, ISM construction spending before early pre-Independence Day close

Commodities

• Crude benchmarks spent the initial part of the session contained before seeing some modest two-way action with catalysts light prior to the renewed upside on the below Russian and Saudi production cut extensions.
• Currently, WTI Aug'23 and Brent Sep'23 are at the top-end of USD 69.93-71.77/bbl and USD 74.75-76.60/bbl parameters.
• Saudi Press Agency reports that Saudi will extend the voluntary cut of 1mln BPD for an additional month to include August.
• Russian Deputy PM Novak says Russia will reduce oil supply in August by 500k BPD, via cutting exports by this figure to the global market.. Subsequently,
• Russian Deputy PM Novak says they will cut production by an extra 500k BPD.*
• Iraq’s June oil exports averaged 3.3mln bpd, according to the Oil Ministry, cited by Reuters.
• Kuwait's KIPIC has put out the fire at the Al-Zour (615k BPD, at peak) without any reported injuries, via Reuters; operations back to normal; production and export operations continue.
• Indian refiners have reportedly began paying in Yuan for some Russian crude oil imports, via Reuters citing sources; in June, IOC was the first state refiner to use Yuan for such payments.
• Spot gold is slightly softer given the USD's strength with the yellow metal erring towards the lower end of USD 1910-1920/oz bounds, while base metals are somewhat mixed though with Copper underpinned on the latest data from the National Statistics Institute of Chile showing that domestic copper output contracted for a second consecutive month.

Geopolitics

• Russian President Putin is reportedly seeking control of more than 100 Wagner Group companies and Russian security services raided Wagner Group institutions, according to Al Jazeera.
• Russian Duma defence committee head said the Wagner Group's departure from Russia's operation does not threaten Russia's combat potential and there is no need for a new conscript mobilisation wave, according to TASS.
• Ukrainian President Zelensky said a serious threat remains at the Zaporizhzhia nuclear plant because Russia is technically ready to provoke a localised explosion at the facility, according to Reuters.
• Ukrainian Deputy Defence Minister Maliar said Russian troops are advancing in four frontline areas in eastern Ukraine amid fierce fighting, while she added that Ukrainian troops were making advances in one eastern area and two southern areas, according to AFP.
• Ukraine urges the US to follow the EU's four-year funding pledge, while it was also reported that the EU considers a Russian bank concession to safeguard the Black Sea grain deal, according to FT.
• CIA Director Burns said it is always a mistake to underestimate Russian President Putin’s fixation to control Ukraine and that the war in Ukraine has already been a strategic failure for Russia, while he also stated that the disaffection in Russia is a once in a generation opportunity for an intelligence agency such as the CIA which is not letting it go to waste, according to Reuters.
• Belarusian President Lukashenko signed a law allowing to ban media from ‘unfriendly countries’ in Belarus, according to RIA.
• Chinese military declaration visited the UK and France from June 4th and July 1st to discuss the development of bilateral defence relations, according to Reuters.
• China's Defence Minister met with Russian Navy Commander-in-Chief on Monday in Beijing, according to Reuters; hopes both sides will strengthen communication at all levels.
• Iran's MOF Spokesperson says, on talks to remove sanctions, that recently they have observed some signs of realism and a shift away from non-constructive attitudes. Though, this is not enough. In talks to achieve an outcome.

US Event Calendar

• June Wards Total Vehicle Sales, est. 15.3m, prior 15.1m
• 09:45: June S&P Global US Manufacturing PM, est. 46.3, prior 46.3
• 10:00: May Construction Spending MoM, est. 0.5%, prior 1.2%
• 10:00: June ISM Manufacturing, est. 47.2, prior 46.9
  • June ISM Employment, prior 51.4
  • June ISM Prices Paid, est. 44.0, prior 44.2
  • June ISM New Orders, prior 42.6

DB's Jim Reid concludes the overnight wrap

Welcome to July, Q3 and the second half of the year. After a Q1 that was positive across the board, Q2 was more mixed for financial markets. Some assets did really well, with tech stocks seeing a strong outperformance thanks to excitement around AI. That extended to other risk assets, and volatility continued to fall as there were no signs of broader financial contagion after the issues in March. However, sovereign bonds lost ground after inflation remained sticky and central banks kept taking rates higher. Commodities also struggled across the board, with Brent crude oil prices down for a 4th consecutive quarter. All-in-all, that meant we had one of the most even quarters in a while in performance terms, with 22 of the 38 non-currency assets in our sample ending Q2 in positive territory. But the strong Q1 means that more assets are still positive over the year as a whole, with 31 out of 38 in positive territory on a YTD basis. Topping the charts, the Nasdaq has had its best first half for 40 years. See Henry’s review of June/Q2 and H1 here that was published earlier this morning

As we kick off July, US Independence Day tomorrow will ensure a stop start week but it remains a big one with US payrolls (Friday) and the global PMIs and US ISMs through the week. May's JOLTS (one month behind), June's ADP and weekly claims (all Thursday) will give us a payrolls appetiser. Elsewhere the RBA (tomorrow) is seemingly a 50/50 call and staying with central banks, the Fed minutes are out on Wednesday with the ECB survey of consumer expectations the same day.

In terms of the key event, all roads of course lead to payrolls on Friday. With the headline number ranging from +217k to +472k over the last 6 months, these are not currently close to recessionary levels. However, the average recession through history has seen payrolls move from an average of just over +100k in the 3-6 months before to very suddenly negative in the first month of the recession where it tends to stay for several months. You don’t tend to get any warning from prior payroll prints that its going to turn negative but with the range this year, and last month being at +339k, we probably need to move down into the 100-200k range before we can be on more near-term recession watch. Even then it still might not happen but that’s probably a necessary condition outside of a shock.

For Friday, our economists expect headline (consensus +225k, DB +200k vs. +339k previously) and private (consensus +200k, DB +175k vs. +283k) payroll gains to slow relative to their three-month averages of +283k and +231k, respectively. This should still edge unemployment back down a tenth to 3.7% (consensus 3.6%) after a surprise spike last month. Hours worked was weak last month and our economists expect that to bounce from 34.3 to 34.4hrs. Hourly earnings are expected to be steady at 0.3%.

In terms of the US ISMs this week, today manufacturing index is expected to come in at 47.1 at DB vs 46.9 last month (consensus 46.3), continuing a trend of all but one month being below 50 since November. Thursday's services ISM (52.9 at DB, consensus 51.3, vs, 50.3 last month) is expected to see a rebound from the second surprise stagnation print in the last 6 months. So put any rebound in some perspective. In addition the employment component in both ISMs may be used to fine-tune payroll predictions. As our economists point out, the three-month average for the ISM manufacturing employment series stood at 49.5 as of May while that of services was 50.4, near the lows of the last cycle. So one to watch. Broadening the focus, various other global PMIs come through in the first half of the week.

Other notable indicators due include the US trade balance on Thursday and factory orders on Wednesday. There will be plenty of activity in Europe as well. In Germany, these include the trade balance tomorrow, followed by factory orders on Thursday and industrial production on Friday. In France, investors will keep an eye on industrial production (Wednesday) and the trade balance (Friday) and, in Italy, PMIs (Monday and services on Wednesday) and retail sales (Friday) are out.

Apart from data, investors may also pay attention to OPEC's 8th International Seminar running on Wednesday-Thursday, with several CEOs and oil ministers expected among the speakers. With oil prices bouncing around $70/bbl amidst the lack of a demand catalyst, the focus will be on whether some OPEC+ members will again try to put a firmer floor under prices.

Asian equity markets are seeing a strong start to the second half, catching up to the broadly positive cues from Western markets on Friday. Across the region, the Hang Seng (+1.69%) is leading gains followed by the Nikkei (+1.55%), the KOSPI (+1.43%), the Shanghai Composite (+1.28%) and the CSI (+1.22%). US stock futures are not seeing the momentum gather any more pace for now with contracts tied to the S&P 500 (-0.03%) just below flat and those on the NASDAQ 100 (+0.07%) trading marginally higher.

Early morning data showed that China’s factory activity growth slowed in June after the Caixin manufacturing PMI slipped to 50.5 in June (v/s +50.0 expected) from 50.9 in May, corroborating last week’s official PMI data even if it was slightly above expectations. Chinese data is at a point where markets are now expecting additional policy support from the administration to support the recovery despite the People’s Bank of China (PBOC) cutting key lending rates last month.

Elsewhere, business sentiment among Japanese firms improved in the second quarter suggesting that the economy was on course for a steady recovery. The BOJ’s quarterly Tankan survey showed that the headline index, measuring the mood of big manufacturers', stood at +5 in June (v/s +3 expected), and up from +1 in Q1 while the index for large non-manufacturers improved to +23, moving up from a level of +20 in March and hitting its highest reading since June 2019.

Now, turning our attention back to last week, on Friday, we had several key data releases. In the US, we had the PCE price index for May, which was in line with expectations, at 0.1% month-on-month, and 3.8% year-on-year. US core inflation softened in year-on-year terms, at 4.6% (vs 4.7% expected), and month-on-month met expectations at 0.3%. However, it was US core services inflation, excluding housing, that caught the market’s attention, which posted its smallest advance since June 2022, rising 0.23% month-on-month, and up 4.53% year-on-year. Consumer spending for May was also soft at 0.1% (vs 0.2% expected). This story was echoed in Europe, as year-on-year CPI came in a touch below expectations at 5.4% (vs 5.5% expected).

Market expectations of US rate hikes for the next three Fed meetings eased a touch following the data releases on Friday, with the expected rate for July down -0.6bps on the day (though still up +2.4bps in weekly terms). Despite a slight retreat on Friday, the expected rate priced in for December 2023 moved up +13.6bps in weekly terms to 5.38%, its highest weekly close of this hiking cycle. Expectations that central banks might have to hold rates at restrictive levels for longer saw pricing for the Fed’s policy rate in December 2024 move up to 4.155%, up +25bps on the week (and +4.0bps on Friday), its highest level since pre-SVB crisis.

While largely unchanged on Friday (-0.1bps), 10yr US Treasury yields were up +10.4bps week-on-week, most of the move coming after the more encouraging US jobless claims data on Thursday. With 2yr yields climbing +3.6bps to 4.90% (and up +15.6bps in weekly terms), the 2s10s slope inverted further to -106.0bp, with just one lower daily close (on 8 March this year) in over 40 years. Earlier on Friday, there was a modest rally in fixed income in Europe as 10yr bund yields fell -2.4bps on Friday, though they were up +3.8bps on the week.

While fixed income was largely subdued, equity markets took Friday’s data as a sign that inflation was moderating. The S&P 500 gained +1.23% on Friday, reaching its highest level since April last year, up +2.35% week-on-week. Information technology once again led the charge, up +1.82% on Friday. As a result, the tech-heavy NASDAQ outperformed on Friday, climbing +1.45% (and +2.19% week-on-week), with the top seven tech megacaps all gaining ground. In this vein, the FANG+ index was up +1.16% in weekly terms (and +1.89% on Friday). A noteworthy event from last Friday was Apple’s market capitalisation crossing the $3 trillion mark for the first time, further driving the tech rally. In Europe, the risk-on tone continued as the STOXX 600 gained +1.94% week-on-week (and +1.16% on Friday).

Lastly, looking to commodities, oil rose on Friday after the weaker US inflation data release. Brent crude gained +0.75% on Friday, and +1.42% week-on-week, to $74.90/bbl, whilst WTI gained +1.12% to $70.65/bbl on Friday, and +2.14% in weekly terms.