The Davy Digest - 8th July 2024

US equities hit record highs last week as Fed Chair Jerome Powell stated that the US is back on a “disinflationary path”. In Europe, the run up to the French election dominated headlines. Last week, investors breathed a sigh of relief as polls indicated that the far right were unlikely to achieve a majority. In a surprise result, it was the far left that won the most seats, although the result will still lead to a hung parliament. (See “Chart of the Moment” below for more detail) Eurozone inflation came in at 2.5% for June, in line with expectations. ECB policymakers are expected to leave rates unchanged at their next meeting on 18th July due to persistently high services inflation. Currently, markets are expecting two more interest rate cuts from the ECB before year end. In the UK election, Labour secured a majority as expected. In China, it was a mixed bag as the Caixin Manufacturing PMI came in higher than expected but the Services PMI disappointed, showing service activity growth at the slowest pace in 8 months.

Last week's highlights

	June PMIs (03/07) – US services sector contracted in June with the PMI coming in at 48.8 vs 52.5 forecast. Nonfarm Payrolls (05/07) – US added 206k jobs vs 190k expected. Unemployment rate rose to 4.1% vs 4.0% expected.
	June Preliminary HICP Inflation (02/07) – In line with forecast at 2.5% YoY. Services inflation still high at 4.1% YoY.  French Election (07/07) – Shock win for NFP, with RN in 3rd. NFP lacks an absolute majority, limiting how much it can do.
	Parliamentary Election (04/07) – Labour wins majority as expected, no major market reaction.
	China Caixin Manufacturing PMI (08/07) – Factory activity grew at the fastest pace since 2021, PMI rose to 51.8 vs 51.2 expected. China Caixin Services PMI (03/07) – Fell to 51.2 vs 53.4 expected, showing service activity growth at slowest pace in 8 months.

Looking ahead to this week, the US Federal Reserve will be watching closely as US inflation is set to be released on Thursday, another soft inflation print would allow rate cuts to begin later in the year. Markets are currently expecting about two more interest rate cuts before year end. In the UK, GDP for May will be released on Thursday. The UK emerged from recession in Q1 with 0.7% (Q/Q) growth. Finally, in China, inflation figures will be released on Wednesday. There is increasing pressure on the Chinese Government to do more to stimulate an economic recovery.

What's on the radar

	US CPI (11/07) US Producer Price Index (12/07) Michigan Consumer Sentiment (12/07)
	Eurogroup Meeting (08/07) German Retail Sales (12/07)
	UK GDP (11/07) UK Industrial & Manufacturing Prodcution (11/07)
	China CPI (10/07)

Chart of the moment

European Government Bond Spreads

Source: Bloomberg as of 08/07/2024. European government bond spreads are the difference in yields between government bonds issued by various countries (France, Italy, Spain above) and German government bond yields. These spreads reflect investor perception of each country's creditworthiness and risk compared to Germany.

• The French election has resulted in a hung parliament with none of the major parties achieving an overall majority. French legislation does not allow for another election to take place in the next 12 months.
• A hung parliament indicates compromise and stalemate. Talks will now take place to form a government.
• The market’s reaction was muted although the spread between the benchmark French and German 10-year yields narrowed by a few basis points. European equities moved higher in the first few hours of trading. 
• The result may lead to some short-term market uncertainty until a government is formed. In the long term, however, a balanced French government that is neither far left nor far right is a reasonable outcome for investors.