US inflation moves in the right direction.

US Inflation continues on the right path.

US prices increased moderately in June as the declining cost of goods tempered a rise in the cost of services, underscoring an improving inflation environment that could position the Federal Reserve to begin cutting interest rates in September.

The increase in PCE inflation was in line with economists' expectations at 0.1% month over month. Goods prices dropped 0.2% after falling 0.4% in May; prices for motor vehicles and parts declined 0.6%. Furnishings and durable household equipment prices dropped for a third straight month, but the cost of other long-lasting manufactured goods rebounded 1.8%.

Prices for gasoline and other energy goods decreased 3.5% after falling 3.4% in May. Clothing and footwear were cheaper for a second straight month.

The report from the Commerce Department on Friday also showed consumer spending slowed a bit last month. Signs of easing price pressures and a cooling labour market could boost the confidence of Fed officials that inflation is moving toward the U.S. central bank's 2% target. The Fed will hold its next policy meeting on Wednesday.

In London, stocks ended the week on a positive note on Friday, with NatWest a standout performer as investors digested a dip in inflation from across the pond.

The FTSE 100 rose 1.21%, closing at 8,285.71 points, while the FTSE 250 saw an even more pronounced rise of 2.26%, finishing at 21,356.30 points.

UK Chancellor of the Exchequer Rachel Reeves said that she would announce the findings of an audit of public finances at the end of July. Press reports have speculated that the review could reveal a deficit of as much as £20 billion, prompting potential tax increases.

The Bank of England revealed a new facility to provide funding for nonbank financial institutions designed to avoid the government bond market volatility experienced two years ago during the short tenure of former Prime Minister Liz Truss. It seems lessons were leant.

UK economic data has been strong recently leading to speculation about whether or not the BoE will follow the ECB and make its first interest rate cut at its August policy meeting.

The STOXX Europe 600 Index ended 0.55% higher, largely thanks to Friday’s rally as investors focused on a better day of quarterly earnings reports but it was mostly due to a positive move from Germany. Among major Continental indexes Germany’s DAX gained 1.35%, France’s CAC 40 Index lost 0.22%, and Italy’s FTSE MIB was down 1.27%.

European equity markets really sagged midweek as earnings in the technology and luxury goods sectors weighed on returns. Tech was particularly weak thanks to negative sentiment spilling over from steep declines in Tesla and other “Magnificent Seven” mega-cap stocks in the US.

Heading into Friday’s official opening ceremonies for the summer Olympics in Paris, French President Emmanuel Macron called for a political truce during the games. Travel disruptions caused by Friday’s arson attacks on France’s high-speed rail infrastructure marred the opening to some degree but didn’t appear to affect the CAC 40 Index for the day.

US stocks recorded mixed returns for the second consecutive week, with small-cap and value shares continuing to outpace the large-cap growth stocks that have led the market over much of the year. Indeed, at the close of trading on Thursday, the technology-heavy Nasdaq Composite 100 Index was lagging the broader S&P 500 Index and barely outperforming the small-cap Russell 2000 Index for the year to date, before large-cap growth shares rebounded to close the week.

The week was also notable for the S&P 500 Index selling off on Wednesday by more than 2% for the first time since February 2023, while the Nasdaq suffered its worst loss since October 2022.

A 12.33% decline in Tesla and a 5.03% decline in Class C shares of Google parent Alphabet following earnings reports contributed heavily to Wednesday’s declines. Nevertheless, as of the end of the week, analysts polled by FactSet were predicting that overall earnings for the S&P 500 had risen by 9.8% compared with the same quarter a year ago, up slightly from the 9.7% estimated the previous week.

In Asia Japan’s stock markets registered sharp weekly losses, with the Nikkei 225 Index falling 6.0% and the broader TOPIX Index down 5.6%. Japanese technology stocks remained under pressure as the shares of U.S. mega-cap technology companies continued to sell off.

The yen strengthened for the third successive week, to around JPY 154.2 against the USD, from a prior JPY 157.45, continuing to hurt the profit outlook for Japanese exporters. This follows indications that the government intervened in the foreign exchange markets earlier in July to prop up the Japanese currency. Yen strength was also attributed to the unwinding of short positions as well as growing anticipation of narrowing U.S.-Japan interest rate differentials.

Chinese equities fell after unexpected rate cuts by the central bank failed to instill confidence in the economic outlook. The Shanghai Composite Index declined 3.07% while the blue chip CSI 300 was down 3.67%. In Hong Kong, the benchmark Hang Seng Index retreated 2.28%, according to FactSet.

The People’s Bank of China cut its medium-term lending facility (MLF) by 20 basis points to 2.3%, its first reduction since August 2023, after holding the rate steady at its regularly scheduled operation on July 15. The move came on Monday, after the central bank reduced its seven-day reverse repo rate, a key short-term policy rate, by 10 basis points to 1.7%. Shortly afterward, Chinese banks cut their one- and five-year loan prime rates by 10 basis points to 3.35% and 3.85%, respectively, making it cheaper for consumers to take out mortgages and other loans.

What to expect next week

The Volatility Index (VIX) moved up near three-month highs this week, primarily driven by a sell-off in tech stocks. Next week provides several potential market-moving catalysts which includes mega-cap tech earnings, an FOMC and BOJ and Bank of England monetary policy meeting, as well as the monthly U.S. jobs report.

On the earnings front we have huge reports to digest from Microsoft, Meta, Amazon and Apple.

Then there is also the Federal Open Market Committee meeting, the monthly jobs report and a Bank of Japan Monetary Policy Meeting.

For mega-cap tech, aside from guidance, investors will likely pay more attention given what happened with Alphabet this week.  We don’t expect a lot of surprises from the FOMC but the BOJ meeting could add some volatility as rate hike discussions are expected.

The Bank of England meeting could be the most interesting after Chief Economist Huw Pill said earlier this month that it was an open question whether the BoE would cut interest rates on Thursday despite inflation returning to its 2% target, as underlying price pressures showed "uncomfortable strength".

In June, the BoE's Monetary Policy Committee voted 7-2 to keep interest rates at a 16-year high of 5.25%. Deputy Governor Dave Ramsden and external MPC member Swati Dhingra backed a cut to 5%.

We are fairly split on the meeting this week. If forced to make a decision on what the BoE will do we would lean towards no cut this month but a cut next month. This is not so much based on economic data as much as political awareness. Inflation will tick up a touch this month, and that won’t look good so soon after they cut, even though we know the two aren’t linked, the press might not.

If making the decision from a purely economic point of view, we would say cut this month and next month. So, will it be politics or economics that takes precedence this week?

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Here's to a great week in the markets.

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