During the month of July, financial markets shifted their attention towards economic fundamentals with particular focus on inflation, global growth and second quarter company earnings.
Global equities as measured by the MSCI World finished up 3%, while global bonds as measured by the Bloomberg US Aggregate index rose 1%.
In the US the resilience of the economy continued to surprise on the upside. June annual headline consumer price inflation (CPI) came down sharply to 3% from 4% in May. The closely watched core CPI which strips out food and energy remained sticky at 4.8% versus 5.3% in May. Key drivers were a fall in energy prices and airline fares, but shelter costs remain elevated.
US jobs growth numbers appeared to be cooling with non-farm payrolls adding 209,000 jobs for the previous month and the growth numbers for April and May were also revised down. The unemployment rate remains at a multi decade low falling back to 3.6% after a rise in May. Wage inflation remains strong at 4.4%.
Even with falling inflation and softening jobs growth the US Federal Reserve (Fed) pressed on with a 0.25% hike taking deposit rates to 5.25-5.5%. This perhaps isn’t surprising considering the inflation target is 2% and unemployment levels are still too low. Furthermore, leading indicators of growth such as the manufacturing purchasing manager’s index remain below the 50-level indicating contraction for the US economy ahead.
