25.07.2022
Despite a sharp deterioration in economic data at the end of last week, European equity markets had a positive week, with both the FTSE100 and DAX closing at six-week highs.
Inhalt
Trading week review
Inflation shows no signs of slowing down
Positive consumer behavior in the USA
Threat of gas supply freeze dampens German economy
Outlook
U.S. markets also ended the week higher, but disappointing numbers from social media company Snap and a sharp drop in the July services PMI caused stocks there to end the week with a setback. That late slide is likely to be reflected in a slightly lower European open this morning. This late Friday weakness seems to reinforce fears that it may be a heads-up to similar disappointments as we look ahead to numbers from Google, the owner of Alphabet, and Facebook, the owner of Meta Platforms, to be released later this week, starting with Alphabet tomorrow. Also not to be ignored is the latest interest rate decision by the U.S. Federal Reserve, which is expected to raise rates by another 75 basis points on Wednesday, after having already raised rates by 75 basis points in June. One of the notable consequences of the recent deterioration in U.S. economic data, as well as European economic data more broadly, is that bond markets appear to be pricing in the possibility that this slowdown in economic numbers could prompt central banks to slow the pace of their rate hike commitments in the months ahead. Bond yields have fallen sharply across the board, with both short- and long-term interest rates falling sharply. These declines came despite the fact that the European Central Bank raised its key interest rate by 50 basis points last week - a move that was unexpected, as the consensus was for a 25 basis point hike. The drop in yields could also be a sign of another force at play, namely that bond markets are now pricing in that central bank actions will lead to some demand destruction and thus a recession in the months ahead.
These fears are also reflected in commodity prices, which have fallen sharply across the board in recent weeks, from agricultural commodities to copper to oil prices. Despite these declines in commodity prices, overall inflation appears to be showing little sign of slowing, with the U.S. consumer price index at a 40-year high of 9.1%, the U.K. consumer price index at a similarly eye-watering 9.4%, and the EU flash consumption index for July expected to be closer to 9% in figures released later this week. Despite these concerns about central banks being too aggressive, there are many reasons to believe that the Federal Reserve will continue to do all it can to drive inflation out of the system, given the relative resilience of the U.S. economy and the fact that U.S. unemployment is still very low by historical standards.
Last week's U.S. retail sales seem to confirm the assumption that U.S. consumers continue to spend despite rising prices and falling consumer confidence. With the exception of May, U.S. retail sales have been positive in every month this year. However, despite the recovery in European and U.S. markets last week, the recovery remains on very shaky ground and will likely face another test this week. Following last week's disappointing July purchasing managers' indexes, the latest German IFO economic survey is expected to add more gloom to Europe's largest economy.
German business confidence has been weakening for several months now, and although the deterioration is gradual, there is little sign of improvement, and this against the backdrop of the looming Russian gas supply freeze. Today we do not expect any improvement either, and although we are not yet at Covid pessimism levels, it may not be too long before we fall back to June and July 2020 levels. The forecasts are for business confidence to deteriorate to 90.1, current situation assessment to 97.5, and economic expectations to 83.
While there are concerns about increasing pressures on headline inflation as well as higher inflation in the U.K. economy, the latest industrial trends data show selling prices have been falling, hitting a record high of 80 in March and are expected to fall further to 55 in July from 58 in June, albeit still at very high levels. Industrial new orders are expected to fall to 13 from 18 in June. The UK economy is facing the same challenges as the rest of Europe, but probably not as bad as the rest of the world, although you wouldn't know it from some of the stories spread by the media.
We continued to bet on a recovery of the euro against the other leading currencies.
Despite a sharp deterioration in economic data at the end of last week, European equity markets had a positive week, with both the FTSE100 and DAX closing at six-week highs.
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