US Data Show Solid Growth, Moderate Inflation

For the week ending 26 July 2024

As of midday Friday, global equities were lower on the week, led by weakness in the Magnificent Seven stocks amid concerns that massive levels of AI-related capex won’t be accretive to the bottom line anytime soon. The yield on the US 10-year Treasury note edged down to 4.20% from 4.23% a week ago while the price of a barrel of West Texas Intermediate crude fell $2.35 to $77.50. Volatility, as measured by the Cboe Volatility Index (VIX), rose to 17.5 from 16.5 a week ago. 

MACRO NEWS

US GDP rebounded in Q2

After growing at only a 1.4% annual rate in the first quarter, the US economy grew at a stronger-than-expected 2.8% rate in the second amid solid consumer demand, helping allay concerns that consumers might be tapped out. Personal consumption contributed 2% while a rise in inventories was a significant contributor to growth. On Friday, the June reading of the US Federal Reserve’s preferred inflation measure, the core personal consumption expenditures price index, rose 0.2%, in line with expectations. From a year ago, it rose 2.6%, slightly above expectations.

Harris takes baton from Biden

US Vice President Kamala Harris became the presumptive Democratic presidential nominee this week after President Joe Biden dropped out of the race under pressure on Sunday. In the past, Harris has favored taxing capital gains at the same rate as ordinary income and advocated for imposing transaction taxes on stock, bond and derivatives trades. She is seen as supporting a transition to green energy and as being less accommodative to Israel. An Associated Press survey found that Harris has secured the support of enough convention delegates to become her party’s nominee. Prediction market Polymarket gives Republican nominee Donald Trump a 60% chance of winning in November against Harris’s 38%. The odds of a Republican sweep of the White House and both houses of Congress stand at 35%.

US curve steepens but avoids breakout

With markets fully anticipating a 0.25% rate cut from the Fed in September, the 2s-10s Treasury curve steepened to -0.15%, a level of resistance that has capped multiple steepening episodes over the past two years. Prior to Thursday’s strong US GDP report, investors had priced in a 20% chance of the Fed cutting rates by 0.5% at its September meeting. As those odds dwindled, the curve flattened back to -0.185%, though it ends the week about 10 basis points steeper than a week ago.

China cuts rates amid weak growth

For the first time since the beginning of the year, the People’s Bank of China cut several policy rates this year, catching the market off guard. The move comes in the wake of weak GDP data earlier in the month and after markets were disappointed by the lack of major reforms announced following last week’s Third Plenum of the Communist Party’s central committee. The unwinding of China’s property bubble remains a persistent drag on growth and sentiment, and analysts have surmised that the sudden urgency on the part of authorities to add liquidity means that the deflationary pressures in the economy and weakness in consumer demand are more severe than what has been priced into assets.

French rail system sabotaged

Just hours before the opening ceremonies of the Olympic Games in Paris, France’s high-speed rail network was sabotaged in a coordinated attack. According to the Wall Street Journal, saboteurs cut and then burned signal cables on three of four major rail lines leading to Paris while an attack on a fourth line was disrupted. Repairs are expected to take days. Prior to the incident, French authorities had warned that Russia could seek to sabotage the games.

QUICK HITS

French President Macron says he will maintain a centrist caretaker government through the entire Olympic Games to avoid “disorder.”

China said on Tuesday that Palestinian factions, including rivals Hamas and Fatah, signed an agreement in Beijing to “end division and strengthen Palestinian unity.”

Flash readings of July purchasing managers’ indices were mixed, though the services sectors in the United States, United Kingdom and Japan showed strength.