Weekly house view | The loser has won
Spain plunged into political limbo after Sunday’s inconclusive election, with the opposition conservative People’s Party winning most seats in parliament but failing to clinch outright victory. The result promises a period of uncertainty while negotiations are held over possible voting alliances, with the possibility that the incumbent left-wing government could be re-elected. The big shock last week came in the UK, where the consumer price index (CPI) rose by 7.9% year-on-year in June, slowing from 8.7% in the prior month. As a result, 2-year Gilt yields declined below 5% and the FTSE100 rose 3.1% 1 (in GBP). Sentiment has improved in equity markets. Sovereign yield curves are adapting to less hawkish market expectations. We continue to favour investment grade bonds.
The US consumer is alive and well, the manufacturing sector in contraction and the labour market tight – all of which means we expect the Federal Reserve to hike interest rates this week. Retail sales rose by 0.2% on the month in June, below expectations for a 0.5% gain, but the May figure was revised up and core sales increased by 0.6% in June. Moreover, online discount sales saw surging demand this month. The US continues to suffer a manufacturing recession, however, with industrial production falling 0.5% month-on-month in June. Jobless claims fell 9,000 to a seasonally adjusted 228,000 for the week ended July 15. US Purchasing Managers’ Indices (PMI) this week will be important to assess the economy’s health. This week will also be big for central banks meetings. We expect both the Fed and European Central Bank to hike by 25bps but the Bank of Japan to hold steady. This is also a heavy week for S&P500 companies publishing their Q2 results. Sluggish smartphone demand and stiff competition has already made its mark in Asia.
In China, second quarter gross domestic product (GDP) disappointed with growth of 6.3% year-on-year, below expectations. On the quarter, the economy grew just 0.8%, down from 2.2% in the prior three months. We have revised down our full-year GDP forecast for China in 2023 to 5.2% (from 5.5% previously). US special climate envoy John Kerry made a four-day visit to China – a step in restoring trust between the two countries even if there was no immediate deal. In commodities markets, oil was up on the back of Saudi production cuts. Wheat prices jumped after Russia pulled out of a U.N.-backed deal for safe Black Sea grain exports and struck Ukrainian ports in response to attacks by Ukraine that knocked out its road bridge to the Crimean Peninsula.