US Gross domestic product grew by 2.8% annualised, mainly thanks to a 2.3% increase in domestic consumption. “Business investment also performed better than expected, while exports were the least dynamic component,” says Guy Wagner, Chief Investment Officer (CIO) of the asset management company BLI - Banque de Luxembourg Investments. “In the eurozone, GDP grew by just 0.3% quarter-on-quarter, mainly due to weak activity in Germany, which contracted slightly.” In China, GDP grew by 4.7% year-on-year, below the official target of 5%. “The central bank's interest rate cuts and the government's fiscal stimulus measures have yet to bring about a recovery in domestic demand, affected by the still depressed state of the property market,” emphasises the Luxembourgish economist. In Japan, the weakness of the yen is the main obstacle to more robust growth, due to its negative impact on household purchasing power. Overall, the global economy remains fragile due to its over-reliance on the US consumer.
Moderate inflation in the US and Europe
Despite the moderation in inflation on both sides of the Atlantic, price indicators excluding energy and food are slowing down less and less due to the continuing rise in service prices. In the US, for example, the overall inflation rate fell to 3.0% in June. The consumer spending deflator excluding energy and food, the Federal Reserve's preferred price indicator, remained stable. In the eurozone, overall inflation rose to 2.6% in July, while inflation excluding energy and food remained unchanged for the second month running.
Central banks in the US and Europe keep key interest rates unchanged
In line with expectations, the US Federal Reserve left its key interest rates unchanged at its July meeting. Nevertheless, the Monetary Committee noted an improvement in second-quarter inflation data, which should give it sufficient confidence that inflation will return to its 2% objective in the medium term, enabling it to proceed in September with the expected 25 basis points cut in its main policy rate. In the eurozone, the European Central Bank left rates unchanged after cutting them last month. Although President Christine Lagarde gave no clear indication of future moves, most analysts are counting on a further rate cut at the next meeting in September.
Decline in bond yields
Moderate inflation and signs of economic weakness, notwithstanding favourable second-quarter US GDP growth, led to a decline in bond yields in July. The yield to maturity on the 10-year US Treasury note fell. In the eurozone, the benchmark 10-year yield declined in Germany, France, Italy and Spain.
Increasing volatility on stock markets
Volatility increased on stock markets in July. After a still buoyant start to the month for most of the major stock indices, technology stocks were hit by profit-taking, triggering further volatility on the markets. “Investors moved away from the technology and communication services sectors towards previously neglected market segments, which were expected to participate more in the stock market rally due to the Federal Reserve's anticipated monetary easing in the second half of the year.” Over the month as a whole, the MSCI All Country World Index Net Total Return expressed in euros ended up by 0.6%, thanks to a very positive final trading session. Geographically, both the S&P 500 in the USA and the Stoxx 600 in Europe were slightly positive, whereas the Topix in Japan was negative due to the rising yen. “Sector-wise, real estate, utilities and finance recorded the strongest gains, while technology and communication services were the only sectors to post a decline over the month,” concludes Guy Wagner.
