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Market Pulse: The US big picture

In this week’s edition of Market Pulse, we focus on the US economy. Inflation data from across the pond this week could have significant implications for interest rates and the global banking sector. We’ll also provide an overview of the most important financial news of the week.

The focus this week: The US big picture

You could think of this week as a kind of scene-setter for what happens next for the US economy, its interest rates, and its banking sector. A big report on Thursday will reveal how consumer prices changed in June. And investors will be hanging onto its every word, hoping to see inflation fall further – a move that could nudge the Federal Reserve (Fed) closer to an interest rate cut. But the country’s banks may be divided on the idea: lower interest rates could be good for the overall economy and investments, but the higher rates have been good for their bottom lines. And we’ll find out more about that on Friday. 

Back in May, overall US consumer prices climbed just 3.3% from the year before – slightly less than expected. That had Investors heaving a sigh of relief after a few unwelcome surprises earlier in the year. Economists expect June’s inflation report to show the overall pace of price gains falling to 3%, with the core measure, which excludes more volatile things like food and energy, holding steady at its three-year low of 3.4%. It would all be a step in the right direction, as far as investors are concerned, but the Fed has been clear about what it wants: a drop closer to its 2% target. So traders still don’t expect a first rate cut until September, followed by another in December. 

The country’s biggest banks don’t seem to mind the wait – nor do they seem disappointed by the fact that the Fed is now forecasting just one rate cut this year, down from three a few months back. See, with higher interest rates, banks like JPMorgan, Citigroup, and Wells Fargo have been charging more for their loans. But they’ve not been passing on those high rates to their depositors, meaning they’ve been pocketing more profit.

What’s more, all 31 of the US’s biggest financial institutions just passed the Fed’s annual “stress test”, giving them the green light to increase their dividends and boost their share buybacks. And, combined with the potential of more profit due to higher-for-longer interest rates, that could prompt the banks to announce juicier shareholder payouts on Friday when they unveil their quarterly earnings updates.

In the calendar 

  • Monday: China loan growth (June), eurozone economic sentiment (July).
  • Tuesday: British Retail Consortium retail sales (June) 
  • Wednesday: China inflation (June).
  • Thursday: UK economic growth (May), US inflation (June). Earnings: PepsiCo, Delta Air Lines, Swatch.
  • Friday: China trade balance (June), US consumer sentiment (July). Earnings: JPMorgan, Citigroup, Wells Fargo.

What you might’ve missed last week

Global

  • Forecasts for global interest rates slid, suggesting that borrowing costs will fall far slower than they climbed.

Europe

  • Inflation in Europe decreased slightly.

UK

  • British fintech Revolut reported a record profit and a near-doubling in sales.
  • Dubai-based engineering firm Sidara continued its pursuit of the UK’s John Wood Group
  • BlackRock acquired British data firm Preqin for £2.6 billion 
  • The British pound strengthened to a three-week high versus the US dollar
  • The country’s manufacturing and construction sectors grew by less than expected in June
  • UK stocks initially rose after the Labor Party secured a majority in the country’s elections

Asia

  • China’s factory activity shrank for a second straight month.

Why it matters

Of the 23 major central banks included in Bloomberg Economics’s latest research, only the Bank of Japan is not expected to lower borrowing costs within the next 18 months. Overall, its findings show the aggregate global benchmark interest rate decreasing by approximately 1.4 percentage points by the end of 2025. That’s a far slower move downward, compared to how quickly it moved upward. In other words, central banks aren’t expected to swiftly undo the unprecedented rate hikes they delivered in response to the post-pandemic inflation crisis.

Consumer prices in the eurozone rose by 2.5% in June from a year ago, down from the 2.6% pace seen in May and in line with economist predictions. But it wasn’t all good news: the closely watched core and services inflation measures both remained stuck at levels that are a bit too peppy for the European Central Bank’s liking. The data suggests that the Bank will probably take a break from lowering borrowing costs this month and wait at least until September for its next interest rate cut.

British fintech Revolut makes money from subscriptions, crypto trading commissions, and transaction fees when customers swap currencies and withdraw cash. And with more folk than ever using its services, the firm saw its revenue almost double in 2023 and net profit hit a record $428 million – a more than tidy pickup from its $7 million profit the year before. That strong showing is apparent in its valuation: recent reports have suggested that Revolut’s aiming to sell shares at a price that would value the company at $40 billion, 20% higher than three years ago.

Economists blamed British election uncertainty for the slowdown in construction and manufacturing last month. Given Labor’s stated policies, which include upping housebuilding – and with UK interest rates likely to fall later this year – construction and manufacturing could both be set for an activity boost. Bigger picture, Labour’s election victory appeared to settle political uncertainties, boosting investor confidence. That might drive international investors to have another look at British assets. Not that they need much encouragement: Dubai-based Sidara is looking to buy John Wood Group, and BlackRock announced a deal to buy UK-based Preqin. A weak pound, despite the recent rally, might’ve played a part in BlackRock’s interest. Still, the bigger theme was probably getting access to unique data and analytics in the alternatives space – which is a big focus for investment managers these days.

China’s official manufacturing purchasing managers’ index tracks the country’s factory activity. In June, that measure fell for a second straight month, coming in at 49.5 – just shy of the 50 mark that separates expansion from contraction. Meanwhile, a measure of non-manufacturing activity in construction and services dipped to 50.5 in June – its lowest since December. Taken together, the indicators suggest that China’s 5% economic growth target this year could be difficult to meet. And potential tariffs from the US and Europe aren’t likely to help matters either.

Disclaimer

This publication has been produced with Finimize. As with all investing, your capital is at risk. This publication does not contain and should not be taken as containing, investment advice, personal recommendation, or an offer of or solicitation to buy or sell any financial instruments. Prospective investors should seek independent financial, tax, legal and other advice before making an investment decision.

 

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