Better-than-expected earnings reports and a view of a potentially less aggressive Fed helped the market catch a sought-after bid. July turned out to be the best month for the S&P 500 and Dow Jones since November 2020, while the Nasdaq’s 12.3% gain was its strongest performance since April of that year.

On Wednesday, the Fed held its Federal Open Market Committee meeting, which concluded with policymakers announcing a widely expected 75-basis-point rate hike. The federal funds target range is now between 2.25% and 2.5%. Fed Chair Jerome Powell said that demand remains strong and the economy is still on track to continue to grow this year. Powell also said that the Fed will be much more data-dependent going forward, given that interest rates are now broadly in line with their estimates of neutral levels. Swaps are now indicating a 3.25% Fed funds rate peak before year-end.

U.S. gross domestic product (GDP) fell by -0.9% y/y in the second quarter, following a decline of -1.6% in Q1. The decline came from numerous factors, including decreases in government spending, inventories and residential and nonresidential investment. While two consecutive quarters of negative GDP growth is informally called a technical recession, the National Bureau of Economic Research ultimately declares recessions and expansions and is unlikely to make a decision on this past period until later in the year. Market participants are now speculating that the deteriorating economic outlook may lead Fed officials to adopt a more dovish stance in the coming months to avoid a significant economic downturn. 

Technology giants such as Amazon.com, Apple and Microsoft delivered earnings beats this past week, sending their stocks higher. Around 56% of the constituents of the S&P 500 Index have reported Q2 earnings, with 75% of firms beating estimates. Meta Platforms and Intel were amongst the stocks that missed estimates, with both firms also lowering their forecasts, resulting in downward moves in their share prices. 

Euro-zone inflation hit a fresh high, coming in at 8.9% in July, up from 8.6% in June. The rise in headline inflation was mainly driven by food and energy prices. The data puts added pressure on the ECB to hike rates by half a percentage point in September. Despite raging inflation in the area, the eurozone economy expanded by 0.7% in the second quarter, more than three times the amount economists expected. 

China is planning to categorize its U.S. stock listings into three broad categories, those with secret data, those with sensitive data and those with non-sensitive data in an attempt to avoid the delisting of many of its companies from U.S. exchanges for failing to comply with audit requirements. However, U.S. regulators said they will not accept any restriction of their access to Chinese audit papers. Alibaba Group, the largest U.S.-listed Chinese company, was recently added to the list of firms that could be delisted if American inspectors are unable to access their financial results. 

U.S. stocks posted solid gains this week, with the Nasdaq (+4.70%), the S&P 500 (+4.26%) and the Dow Jones (+2.47%) ending in the green. Shares in Europe (Euro Stoxx 50) rose +3.10% while the FTSE 100 managed a +2.02% gain. The tone was more somber in Asia, as a tumble in Chinese tech shares dragged Hong Kong towards a correction of more than 10% from a June high. The Shanghai Composite ended -0.51% lower for the week, while the Nikkei 225 dipped by -0.40%. Brent oil (+0.03%) edged higher while Gold rose by +2.26%. 

Market Moves of the Week:

Positive news flowed out of South Africa over the week, as much-needed electricity reforms were announced, lifting the country’s outlook. On Monday, South African President Cyril Ramaphosa embraced the private sector and announced that companies will be allowed to build power plants of any size without a license to meet their own needs, scrapping the 100-megawatt limit on plants that needed a license. These firms, along with households and building owners that utilise solar panels, will now be able to sell excess energy to the grid. Several other significant steps were announced, providing hope that the 14-year-old power crisis may soon be coming to an end. 

Staying in line with the energy theme,  South Africa’s Treasury is finalising a plan to take over part of Eskom’s R396 billion debt. This move is aimed to better position the company and place it on a more sustainable foundation, a top official said. More information on the deal is expected to be announced in the Mid-Term Budget Speech in October. 

On the economic front, South Africa’s June Producer Price Index rose 16.2% y/y, the fastest rate in 14 years. The print came in above expectations of +15.6% and May’s +14.7% figure, according to Statistics South Africa. The coke and petroleum basket of products saw inflation of 37.2% in the year to June, while food, beverage and tobacco products cost over 10% more. 

The JSE climbed +1.27% this week, in line with global peers. Resource stocks surged +5.86%, led by Impala Platinum (+14.6%), as the price of platinum group metals rose over the week. The rand strengthened to end the week at R16.62/$, however, U.S. Dollar strength still remains a threat to the volatile rand.

Chart of the week:

What the chart is telling us:

The most investors since the Global Financial Crisis (GFC)/Lehman think that inflation will be lower in the next year…lower inflation expectations mean lower interest rates. Source: BofA Global Fund Manager Survey.