First Plus Market Update July 2022
July 2022 Global Market Recap
1st July 2022 – 31st July 2022
FULL REPORT ACCESS LINK: First Plus Market Update July 2022
Macro:
US unemployment rate remained unchanged at 3.6% in June from a month prior, close to its 50-year low of 3.5% in the first quarter of 2020. Average hourly earnings advanced 0.3% month-over-month and increased 5.1% from the same period a year earlier. The consumer price index gained 9.1% year-over-year in June, a record-high in over four decades, surpassing consensus for an 8.8% increase. Retail sales rose 1.0% in June over the previous month, higher than consensus of a 0.8% gain and mainly due to rising inflation. Led by an increase in defence aircraft, durable-goods orders in the United States surprisingly gained 1.9% in June month-over-month, above consensus of a 0.5% fall, and higher than the 0.8% increase a month prior. Core capital goods orders rose by 0.5% in June, matching May’s reading.
China's official manufacturing PMI fell 1.2 to 49 in July, missing consensus forecast of 50.4 and back into contraction territory, suggesting increasing pressure on both internal and external demand. The non-manufacturing PMI index fell 1.5 to 53.8 in July, remaining in expansion territory and continuing its recovery from the pandemic. Total retail sales of consumer goods rose 3.1% year on year in June, mainly boosted by recent growth-enhancing policies. China’s surveyed urban unemployment rate fell from 5.9% to 5.5% in June 2022. However, youth employment continues to be under pressure, with the unemployment rate of 16- to 24-year-olds rising to a record 19.3% from 18.4%, a steady increase since December last year. Profit of industrial enterprises above designated size from January to June 2022 increased by 1.0% year-on-year, unchanged from the growth rate from January to May 2022. China's headline inflation index has surged from less than 1% several months ago to 2.5% in June, with rising hog prices to be the main factor. The PPI rose 6.1% year over year, beating analysts forecast of 6% and down 0.3% from last month’s figure.
China's GDP grew 0.4% YoY in the second quarter of 2022, below the market consensus of around 1.1%. The Political Bureau of the CPC Central Committee held a meeting on 28th July and called for compliance with strict Covid-zero policies and achieving the best possible economic and social development outcome without explicitly mentioning the 5.5% GDP target announced in March 2022.
Stocks:
Equity markets in the US and Europe are holding steady after the recent sharp correction, despite alarming news of soaring inflation, negative GDP growth and continued market fears of a recession. US stocks had their best month in two years, aided by better-than-expected corporate earnings. The S&P 500 climbed 9.1% in July, cutting the year-to-date loss to 13.3%, while the Dow Jones Industrial Average rose 6.7% and fell 9.6% year-to-date. The Nasdaq Composite Index saw a 12.3% gain in July, recouping more than a third of the losses it suffered in the brutal first half of 2022.
Since early July, the previously strong A-share market has weakened, and market volumes have declined. The Shanghai Composite Index fell 4.3%, the Shenzhen Component Index fell 4.9%, the CSI 300 fell 7% and the ChiNext Index fell 5%. The volatility of A-shares market may increase on the backdrop of multiple internal and external factors including the strength and sustainability of the domestic economic recovery, heightened US-China geopolitical tensions, Q2 corporate earnings, pro-growth policies, real estate issues, as well as recession expectations in major economies abroad. A conflicting political cycle between China and major economies abroad may continue to underpin the relative resilience of the China stock market.
Rates:
The 10-year U.S. treasury yield decreased by 36.42bps during the month as the Federal Reserve hikes interest rates by 75bps, the fourth time interest rates have increased this year to fight inflation. The 75bps increased was in line with the market’s expectations and the Fed also signaled a possible third consecutive large increase at the next FOMC meeting at the end of September. The 2-year U.S. treasury yield closed at 2.88% and has exceeded the 10-year rate since July 5. The People’s Bank of China kept the five-year loan prime rate and the one-year loan prime rate unchanged at 4.45% and 3.70% respectively, in-line with market expectations. China’s overnight repo rate fell below 1% in the month, in another sign that much of the liquidity the PBOC is providing is sitting in the banks. This underscores the difficulty Beijing faces with boosting growth, ample liquidity is failing to stimulate demand, which remains weak due to the nation’s Covid-Zero strategy and growing housing crisis. The European Central Bank increased interest rates by 50bps, exceeding market expectations of a 25bps increased.
Credit:
Global bonds are headed for the biggest monthly gain since November 2020 as the market’s focus switches to a fear of recession amid rapid Federal Reserve interest-rate hikes, as reported by Bloomberg. Markets are pricing in a peak US interest rate of 3.2 per cent by the end of this year and 50 basis points of rate cuts in 2023. China’s bond market is becoming the locus for global capital outflows and there are signs the government is growing concerned about the US$30 billion exodus as it delays data and seeks to manage investor expectations. Foreign funds offloaded 55.9 billion yuan (US$8.3 billion) of the nation’s debt in June, a fifth month of net sales that swelled the total outflows this year to 200 billion yuan. Demand for Chinese bonds has waned in recent months as US 10-year yields surged above 3%, while similar-maturity yields in China remained stuck in a range of 2.7% to 2.85% due to the People’s Bank of China’s accommodative monetary policy.
FX:
The Dollar Index rose by 1.2% in the month and the greenback’s gains this year have been fueled by a combination of higher central bank interest rates, haven buying, and recession concerns. It has been nearly two decades since the US dollar was this strong and there are no alternatives challenging the dollar’s status as the world’s reserve currency. The Euro depreciated by 2.5% against the dollar as the European economy tips toward a recession. The Euro dip below the dollar for the first time in the month in more than two decades. The Yen appreciated by 1.8% against the dollar as traders betting against the Japanese currency reassess the interest rate outlook. Japan's currency has done a U-turn out of a slump that took it from around 115 to the dollar in mid-March to a 24-year low beyond 139 earlier this month. The war in Ukraine has accelerated Russia’s pivot east and sent local demand for China’s yuan surging, helping tame a four-month ruble rally that’s piled pressure on companies and the budget.
Commodities:
Brent crude and WTI oil prices decreased by 4.2% and 6.8% respectively during the month of July, falling for the second-successive month as weakening demand expectations outpace fears of tightening supplies. Natural gas prices surged 52.2%, and at one point during the month to a 14-year high before correcting, as Russia reduced Nord Stream gas imports to Germany to approximately 20% of capacity due to turbine maintenance issues. The continued outage of Freeport, the second-largest U.S. export plant generating liquefied natural gas (LNG), till at least October also weighed on supply. U.S. gasoline price fell by 8.5% during the month, reflecting weakness in oil prices, the main component of gasoline costs. Copper prices in Shanghai tumbled 7.1% as continued coronavirus lockdowns in China’s major cities and recession risk in Europe due to elevated energy prices undermined investors’ confidence. Wheat prices corrected by 6.6% as the United States’ Spring season wheat harvest is forecasted to be a bumper crop in the forthcoming weeks. Bitcoin rallied 27.9% in July, reversing partially its decline in recent months, as the U.S. Federal Reserve indicated the pace of interest rate hikes will slow down eventually and the next FOMC meeting will be held only in the later part of September.