Economic data in July provided further evidence of a slowing global economy. Inflation continued to soar to new highs, central banks raised interest rates and GDP growth numbers were negative.

In the United States the Consumer Price Index (CPI) reflected a year-over-year increase of 9.1% in June, up from the prior 40-year high of 8.6% in May. Economists were expecting June's reading to show an 8.8% increase. As a result more aggressive interest rate increases by the FED were anticipated and the dollar gained against the Euro, shortly even breached par, meaning that for a few hours the dollar was stronger than the Euro for the first time in 20 years.

US GDP growth for the second quarter of 2022 came in at -0,9%, well below the expected +0,5% and following a -1,6% GDP growth in the first quarter. The FED for the second time increased the interest rate by 0,75% to 2,50%. Labour markets remained a bright spot with the remarkably low unemployment rate driving nominal wage growth. Heightened inflation, however, meant that real wage growth remained negative. While two quarters of negative growth means the US is technically in recession, the strength of the labour market means that the National Bureau of Economic Research is unlikely to formally declare one at this stage.

And yet, despite these numbers, US stock indices had their best monthly performance in 2 years, particularly during the last few days of the month, following the interest rate decision. Stock markets valuations are always ahead, incorporating future expectations and, with the FED's agressive interest rate decisions, the markets are already pricing in declining inflation and even future interest rate cuts. 10-year treasury yields dropped from 3,017% to 2,67%. The S&P500 index climbed 9,11%, Dow Jones climbed 6,71% and Nasdaq 12,35%.

In Europe high inflation pushed the European Central Bank (ECB) to deliver its first interest rate hike in over a decade, taking the eurozone out of negative rates. Eurozone Q2 GDP did however surprise to the upside, with the economy proving relatively resilient to the geopolitical headwinds so far.

The other issue facing Europe remained gas supply. Despite fears to the contrary, the Nordstream 1 pipeline reopened after its scheduled maintenance period. Russia however announced a reduction and gas prices rose sharply towards month-end. To shore up domestic supplies, the European Commission requested that countries look to reduce their consumption by 15%.

Also European indices booked gains with the DAX, Eurostoxx and CAC40 gaining 5,48%, 7,33% and 8,87% respectively. The Slovene SBITOP index booked a modest gain of 1,73%.

As opposed to June, the only equity market booking a loss was China with the Hong Kong Hang Seng index dropping 7,79%. China continued to grapple with the Omicron outbreak and a series of rolling lockdown measures were enacted in various cities. Economic data, however surprised to the upside particularly with regard to exports growing 17.9% year-on-year. However concerns about the property market impacted the real estate and financial sectors.

Rudy Marchant
Fund manager Primorski skladi d.o.o. Koper

Monthly reports - July 2022