Global Markets Rally In Frist Half, Nasdaq Delivers Best Performance In Four Decades

Scott Peters
02 Jul, 2023
New York City

World markets rallied in the first half, surprising most experts and market watchers after inflation receded and rate hike worries subsided. 

Despite the easing of inflation in the U.S. and Europe, prices are still rising at a rapid clip and faster than 2% target set by central banks around the world. 

Central bankers used a gathering in Portugal to remind investors that policymakers are not done with lifting rates, and more restrictive rates are on the way. 

The chorus of heads of central banks of the U.S., European Union, UK and Japan reiterated inflation in the Western economies is still too high and rates have a long way to go before central banks will consider pausing. 

Market rallied on the final day of the week, month, quarter and the first half.  

 

U.S. Economic Data Show Positive Trends 

Key economic evets of the week included GDP, new home sales and durable goods orders and a key measure of inflation in the U.S.

The Price Consumption Expenditure index, a measure of inflation, increased 3.8% in May from a year ago and rose 0.1% from the previous month. 

Core PCE index, which excludes food and energy, increased 0.3% as expected and rose 4.6% from a year ago. 

The overall inflation and core inflation measures slowed from the previous month and from a year ago, extending the trends seen in the last five months. 

In the third estimate, real U.S. economic growth was revised sharply higher to 2.0% from 1.3% in the previous estimate.  In the fourth quarter of 2022, real GDP increased 2.6%. 

Higher consumer and public spending and exports contributed to the upward revision. 

U.S. international goods trade deficit in May declined 6.1% to $91.1 billion from $97.1 billion. 

Durable goods orders rose more than expected and new home sales also advanced. Durable goods orders expanded in May 1.7%, faster than upwardly revised 1.2% in April. 

New home sales jumped 12.2% to 763,000 units on a seasonally adjusted basis. 

The annual rate jumped to a high not seen since February of last year and increased 20% from a year ago when the annual rate was estimates at 636,000 homes. 

 

European Markets Rallied After Inflation Eased

Consumer price inflation in the eurozone eased to 5.5% in June from 6.1% in May and the consumer inflation rate dropped for the third month in a row and fell to the level last seen in January 2022 or 17 months ago.  

On a monthly basis, consumer price inflation and core inflation were 0.3% in June. 

Investors cheered the steady decline in inflation but the level remained above the European Central Bank's target rate of 2%. 

Moreover, core inflation, which excludes volatile food and energy, increased to 5.4% from 5.3% and stayed near the recent peak of 5.7%. 

In the currency union, inflation in Germany accelerated to 6.8% from 6.3% but slowed in Austria, the Netherlands, Portugal, Italy and France. 

Inflation in Spain, Luxembourg and Belgium dropped below the ECB's target level of 2%. 

Spain's retail sales in May surged 6% from a year ago from the revised 5.7% in April and sales in May increased for the sixth month in a row. 

 

Record Low Unemployment In Europe 

The seasonally adjusted unemployment rate in the Euro Area held at 6.5% in May and matched previous month's rate but fell from 6.7% in the month a year ago. 

The record low unemployment rate highlighted tight labor market conditions and the number of unemployed declined by 57,000 from the previous month to 11 million, the lowest level since record keeping began in 1995. 

Compared to a year ago, unemployment decreased by 257,000 in the European Union and 227,000 in the Euro Area. 

Jobless rate among young workers, those below the age of 25, held at 13.9% or 2.226 million compared to previous month. 

 

Swedish Krona Dropped to New Low Against Euro

The central bank of Sweden lifted its policy rate by 25 basis points to 3.75%, seventh rate increase in a row. 

The central bank raised rates to the level last seen in 2008 and left its inflation outlook to 8.9% in the current year but revised higher to 4.3% from the previous estimate of 4% in 2024. 

Swedish krona faced fresh selloff after the central bank lifted rates at a slower pace. 

The krona dropped to 10.8 against the dollar and plunged to a record low 11.8 against the euro after weaker-than-expected rate increase and risk aversion kept the currency under pressure. 

Sentiment for the currency weakened on the fears that the central bank has little flexibility in lifting rates on the worries of a deepening rout in the property sector, after higher rates plunged property prices by 20% from the peak in March 2022. 

 

China's Manufacturing Contracted Again, Record Youth Unemployment

In Asia, China’s factory activities remained in contraction for third month in a row, according to the official data.

The official composite PMI, which includes both manufacturing and services activity, fell to 52.3 in June, from 52.9 in May.

China’s economic recovery has also been hit by rising youth unemployment as well as disappointing retail sales and industrial production.

Youth unemployment in China rose to a new high of 20.8% in June despite the overall jobless rate remained unchanged at 5.2% in May. Youth jobless rate is expected to rise in coming months as about 11 million college graduates start looking for jobs.

Marriages or wedding registrations in China dropped to 6.8 million in 2022, the lowest level since 1979 after peaking above 11.5 million in 2013.

 

Japan Inflation Stays Elevated 

Turning our attention to Japan, retail sales rose 5.7% in May, an increase above 5% for the fifth month in a row.

Japan’s industrial production declined 1.6% in May and fell for the first time in four months but despite the decline most economists are anticipating production to rebound in the quarter.

Tokyo consumer inflation rose 3.1% in June and accelerated for the second time in three months, raising expectations that the Bank of Japan will revise higher its inflation forecast.

 

Japanese Yen Level Raises Fears of Intervention 

The yen dropped below 145 against the dollar for the first time since November on Friday, inching closer to a level where Japan intervened for the first time since 1998.

 

Rising Service Exports Improve India's Current Account Deficit

India’s current account deficit declined in the March quarter to $1.5 billion, a sharp fall from the previous quarter after service exports surged and import fell on weaker prices of commodities.

In the financial year 2023 ending in March, the current account deficit increased to $67 billion or 2.0% of GDP from $38.7 billion or 1.2% of GDP in the previous year, reflecting a sharp jump in international trade deficit to $265.3 billion from $189.5 billion. 

 

Global Markets Rallied 2%, Reversing Previous Week's Loss

Stocks market rallied in the U.S., Europe, Japan and India and closed the first half on a high note.

Despite the Federal Reserve, the European Central Bank and the Bank of England strongly reiterating the need to raise rates, markets continued to power ahead.

The S&P 500 index advanced over 5% in June and jumped over 7% in the second quarter and soared 16.5% in the first half. 

The Nasdaq Composite increased over 5% in June, advanced over 12% in the second quarter and jumped nearly 33% in the first half. 

European markets closed higher on Friday and extended gains in the second quarter and in the first half.

At the end of the first half, the DAX index advanced 14.8%, the CAC-40 index gained 12.2% but the FTSE 100 index fell 0.3%. 

 

Economic Calendar Week Ahead  

In the week ahead, the U.S. is set to release non-farm payrolls data for June.

In Europe, France is schedule to release its international trade data, Germany will report foreign trade, factory orders and industrial production for May.

In Asia, India and China are expected to release manufacturing surveys and Japan is set to report Tankan large manufacturers index for the second quarter.

Indonesia and Philippines are set to announce inflation indexes.