Global shares fell, and the dollar weakened on Monday after the data release indicated slower-than-expected growth in the Chinese economy. However, U.S. stocks managed to rise on the anticipation that company earnings would surpass forecasts and the strong likelihood of continued consumer spending.
China's GDP Growth and Mixed Monthly Data
China surpassed expectations in the second quarter, experiencing a notable growth rate of 0.8%, surpassing the estimated 0.5%. This impressive performance reflects the nation's resilience and economic prowess. However, the annual pace of growth slowed more than expected to 6.3%, well below the expected 7.3%. Analysts view this data as an indication that China's post-COVID economic boom is coming to an end. In contrast, concerns in the United States about a severe economic downturn faded earlier this year as slower consumer inflation has brightened the outlook. This positive trend is reflected in the second-quarter results reported by companies.
Optimistic Outlook for U.S. Earnings
Anthony Saglimbene, chief market strategist at Ameriprise Financial in Troy, Michigan, remarked that while companies face a slightly higher hurdle rate compared to the past few quarters, S&P 500 companies have generally been able to surpass the low analyst estimates that were set prior to the current earnings season. Going forward, the market will closely monitor whether demand remains strong and whether the corporate outlook remains positive for the rest of the year.
Anticipated Earnings Reports and Market Reactions
This week, several prominent tech companies and banks are set to release their earnings reports. Major names reporting include Tesla, Bank of America, Morgan Stanley, Goldman Sachs, and Netflix. The stock market showed positive momentum on Wall Street, with the Dow Jones Industrial Average climbing by 0.18%. Similarly, the S&P 500 experienced an increase of 0.20%, while the Nasdaq Composite outperformed with a significant rise of 0.47%. These upward trends indicate a promising outlook for investors and highlight the market's robust performance.
European Stocks Weaken
In Europe, stocks experienced weakness, with the pan-European STOXX 600 index down by 0.60%. Meanwhile, MSCI's U.S.-centric gauge of stocks globally showed a slight decrease of 0.01%.
Dollar Remains Steady as Investors Await Fed Meeting
The dollar traded relatively flat against a basket of currencies after experiencing its largest weekly decline in 2023 last week due to decreased Treasury yields. Investors eagerly await the Federal Reserve's upcoming meeting, during which a 25 basis points rate hike is widely anticipated.
U.S. Retail Sales Data and Monetary Policy
The main U.S. economic data for the week will be the retail sales figures for June, set to be released on Tuesday. While this data is not expected to impact monetary policy or market direction significantly, it is anticipated to show a rise of 0.3% ex-autos, aligning with the market's favored soft-landing theme. The futures market is pricing in an additional 32 basis points of tightening this year, with the benchmark rate projected to peak at 5.40% in November. As a result, the market feels that the chances of further rate hikes after the conclusion of the two-day meeting of the Federal Reserve on July 26 are slim.
Treasury Yields and Inflation Outlook
U.S. Treasury yields experienced a sharp decline last week due to the moderation in consumer and producer price inflation during June. This decrease has raised expectations of a more dovish monetary policy.
The two-year Treasury yield, which is closely associated with interest rate projections, experienced an increase of 1.5 basis points, reaching 4.766%. In a similar vein, the benchmark 10-year note also saw a rise of 1.4 basis points, reaching 3.834%. These movements in yields indicate a shift in interest rate expectations, potentially impacting various financial sectors.
Image source from Reuters
Sterling Weakens Ahead of UK Inflation Figures
Sterling reversed its course, declining by 0.2% to $1.3089 in anticipation of the release of UK inflation figures this week. If the data indicates higher inflation, the risk of a substantial rate hike by the Bank of England has increased. Analysts at CBA noted that a lift in the core CPI could encourage financial markets to anticipate further tightening from the Bank of England, potentially pushing GBP/USD towards upside resistance at $1.3328.
Oil Prices Drop Due to Weaker Chinese Economic Growth
Oil prices fell more than 1% after the release of Chinese economic growth data failed to meet expectations. The price of US crude oil experienced a decline of 0.74%, settling at $74.86 per barrel. Similarly, Brent crude oil also faced a decrease of 0.81%, reaching $79.22. These downward shifts in crude oil prices suggest a potential adjustment in the energy market, impacting global economic dynamics and influencing various industries reliant on oil.
In Summary, global shares experienced a dip due to disappointing Chinese economic data. At the same time, U.S. stocks managed to gain as investors expressed confidence in strong company earnings and continued consumer spending. The anticipation of key earnings reports and the upcoming Federal Reserve meeting have been key factors influencing market sentiment. Investors will closely watch future developments in China, US retail sales data, and central bank policies to gauge the momentum in global financial markets.