The global manufacturing cycle appears to have hit a low point and US is expected to have a gradual slowdown this year with the growth being low till 2025. The path to 2% inflation is expected to me rough than last year. We do except improvement in growth in Europe with lower energy prices and expect all central banks to ease the policy this year. Strong wage gains in Japan will boost domestic consumption and there is an expectation of hiking the policy rate at least once more in this year itself.

China's economic growth will remain under pressure from the adjustment in the housing market. However, fiscal expansion, manufacturing exports and services consumption should support China's economy to meet its growth target this year which is in the range of 5-6%

July witnessed a weaker than expected US CPI which along with weaker US labor market data gave indication to the bond investors that the Federal Reserve will soon begin cutting interest rates. This led to the outperformance of Interest-rate sensitive asset classes. Small-cap returns were up 6.9% over the month, with global REITs posting a healthy 6.0% and the Bloomberg Global Aggregate Bond Index delivering 2.8%. In contrast, developed equities returned 1.8% over the month. Growth stocks fall by 1.0%, as investors grew more skeptical about the potential for future returns from investment in artificial intelligence (AI).

In the US, earnings season continued with four of the 'magnificent seven' reporting results for the previous quarter, resulting in the tech sector coming under pressure for most of July before a rebound into month end. The S&P 500 gained 1.2% over the month. With over half of S&P companies having reported, more than two thirds have beaten analysts' expectations, suggesting a resilient US economy is contributing to a broadening of earnings.

UK stocks outperformed, with the FTSE All-Share rising by 3.1% over the month. Robust service sector PMIs in July, coupled with stronger than expected economic growth for the second quarter, both pointed to improving economic momentum.

The Japanese TOPIX index underperformed last month, falling 0.5%. This decline partly reflected the weakness in global tech stocks, but returns were also pressured by a strengthening yen. Expectations of earlier Fed interest rate cuts, coupled with an interest rate hike from the Bank of Japan led to the yen appreciating by 6.5% versus the US dollar, the strongest monthly move since June 2016.

Chinese equity markets fell last month, due to continued challenges in the real estate sector and the spillover effects on the broader economy. The MSCI China Index fell by 1.2% in US dollar terms. However, Chinese authorities implemented measures to provide liquidity support to the financial system, including cutting the reverse repo rate, a key short-term policy rate, and lowering the benchmark loan prime rate. These efforts aim to stimulate lending and support economic growth amid ongoing market challenges

In the US, June's soft CPI and a weakening labour market have heightened investor expectations for Fed rate cuts in 2024 and 2025. This optimism boosted US Treasuries, which gained 2.2% over the month. The rally at the front end of the curve also caused the yield curve to steepen, with the spread between the 10-year and 2-year US Treasury yield reducing to -21 basis points, its narrowest level since January 2024.

In the UK, stronger than expected GDP growth in the second quarter, along with persistent services inflation, suggests that interest rate cuts may be more gradual compared to the US and Europe. UK Gilts underperformed, returning only 1.9% over the month.

In the eurozone, government bonds continue to outperform core bonds as investors seek higher yields in anticipation of further European Central Bank interest rate cuts. Italian and Spanish sovereign bonds returned 2.8% and 2.3% over the month.

In Japan, the Bank of Japan continued to normalize monetary policy in July, raising its policy rate by 15 basis points to 0.25% and stating that it will reduce the pace of Japanese Government Bond (JGB) purchases by 400 billion yen per quarter starting in August.

In the credit market, investment grade (IG) bonds outperformed high yield bonds. The Bloomberg Global Aggregate Corporate Index – which measures the performance of developed market IG bonds – returned 2.4% over the month. In contrast, US high yield bonds returned 2.0% and European high yield bonds returned 1.2% over the same period.

July 2024