Markets Wrap (2H July)

Poor PMIs in Europe signal a poor start to 3Q
Eurozone PMIs receded unexpectedly in July. After a continued advance up to May, summer so far is indicating a short-lived growth return. The composite PMI is now at roughly 50, implying a sideways economy. Manufacturing PMIs were still bad, as the sector seemingly has no traction. Germany has had an especially poor showing, its industrial sector has been the main laggard in the region, with few signs of an incoming upturn. However, despite poor eurozone factory performance, 2Q was relatively good for the eurozone. GDP has grown 0,3% QoQ, at the same speed as in 1Q, outperforming the median forecast of 0,2%. While Spain was growing at 0,8% and was the best performer among the large eurozone countries, Germany has defied the odds and its GDP shrunk 0,1%.

Increasing bets for ECB rate cuts

After disappointing PMI numbers, the ECB rate cut expectations started to improve. Now, even with no guidance from the ECB and Lagarde staying ambiguous about September rate cut the markets are rather optimistic. The market is predicting a 0,25%pt reduction in interest rates with almost 100% certainty for September and December and a tossup for October meeting. Its rather interesting that there was almost no reaction from July's inflation figures - consumer prices in the eurozone rose have risen by 2,6%, faster than 2,5% in July and what the market was hoping for. It seems that the market is under the impression that this is just a bump in the inflation slowdown journey with little risk that it will derail the possible cuts.

The US economy is still chugging along

The Land of Liberty has grown at an annualized pace of 2,8% in 2Q, up from 1,4% in 1Q and far above expectations of 2%. Even though the pace of growth picked up from the first quarter, the figures still represent a moderation from last year. Consumer spending and broader economic activity have cooled under the weight of high interest rates, which is simultaneously helping to tame inflation gradually. At July's FED meeting investors and businesses received some support for rate cuts. Jerome Powell says September rate cut could be “on the table.” The market is hoping for a dovish FED and is predicting cuts at every meeting this year, in total 0,75%pt lower rates by end-year.

"Sector rotation" one of the most overused terms in the past weeks

Better than expected US inflation figures have fueled small cap stocks, growing the Russell 2000 around 10% during June, during the same period the Nasdaq 100 receded by 2%. While the rather "unloved" small cap stocks have gained more attention, I think it's too early to call this a sector rotation. Coinciding with the rapid rise, Google trends data shows that the term "Russell 2000" has had the highest interest since data collection start in 2004. While small caps may be undervalued, they are still lagging their larger peers in terms of their financial growth - earnings have sharply receded from their highs from 2022. While 2025 EPS is expected to show ~30% growth comparing to 2024, only time will tell if the small caps manage to attract more investor attention sustainably.

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