July economic review

4 min read

James Dunn

US shares in July faced the usual buffeting from political events – both domestic and geo-political – but improving economic data and corporate profit results proved more than a match for the negative headlines, pushing the three main US indices higher.

For the month, the Dow Jones Industrial Average gained 2.7%, to close at a record high; the S&P 500 rose by 2.1%, while the technology-heavy Nasdaq Composite index climbed 3.4%. The three main US indices have now risen in eight of the past nine months.

The erratic nature of the Trump presidency continued, marked by departures from the f White House of the chief of staff and communications director. Investigations continued into possible Russian government links with Donald Trump’s presidential campaign; and North Korea raised the tempo of its sabre-rattling. But positive economic data allowed investors to overlook these developments to a large extent.

The US economy grew at an annual growth rate of 2.6% over the June quarter, more than double the rate recorded in the previous quarter (which was revised downward to 1.2%). The number of jobs created in the US economy was well ahead of expectations in June, with 220,000 jobs added; revisions to earlier estimates brought the monthly average gain since April to 194,000.

However, wage growth continued to remain weak, coming in at an annual rate of 2.5% in June. June US consumer spending matched expectations at 0.1% growth, well short of the buoyant 0.5% gain of March. The Federal Reserve held rates steady in July, saying that it would start unwinding its balance sheet “relatively soon”, and that  they are somewhat worried by the brittle wage growth.

However, in the face of this negative economic news, according to Thomson Reuters I/B/E/S, S&P 500 earnings were expected on average to have grown by 10.8% in the second quarter. This news provided optimism and a reason that powered the stock markets over the month.

In Europe, the Eurozone economy continued to improve, with the International Monetary Fund (IMF) revising its growth forecasts upward in July for the bulk of the 19 countries, including the big four of Germany, France, Italy and Spain, after better-than-expected first quarter figures. France grew by 0.5% in both the first and second quarters

Germany, Europe’s largest economy, is projected to grow by 1.8% in 2017, up from the previous estimate of 1.6%, while France is forecast to expand 1.5 percent, up 0.1 percentage point. Expectations for Italy and Spain have been lifted by a substantial 0.5 percentage point: the formerly struggling economies are now expected to grow by 1.3% and 3.1%, respectively. Overall, the IMF expects the Eurozone economy to expand by 1.9% this year, up from its previous projection of 1.7%. 

Economic sentiment across the Eurozone improved in July, despite the euro continuing to rise against the US$, which hurts the continent’s exporters. The European currency gained 3.6% in July, and has surged about 12% against the greenback since the start of the year. The currency is turning into a headwind for Eurozone corporate earnings, which are being downgraded from growth expectations of 10.7% for 2017 to single-digit territory; but perhaps counter-intuitively, the Munich-based Ifo Institute for Economic Research reported in July that German exporters were in “high spirits,” despite the rising currency. Ifo’s index of German business sentiment reached another record level in July.

The Euro STOXX 600 index lost 0.4% in July, following June’s loss of 2.7%, to sit at its lowest level since April. The German DAX lost 1.7% on the month and the CAC-40 in Paris slipped 0.5%. In London, the FT-SE 100 eked out a 0.8% gain for July, as the UK economy grew by a relatively weak 0.3% in April-June, following a lacklustre expansion of 0.2% in the March quarter.

In Asia, the Chinese economy grew by 6.9% year-on-year in the June quarter, ahead of expectations for 6.8% growth, despite the central government emphasising that regulatory tightening would continue, to rein in excessive credit and an overheating property market. Construction activity in July was its highest level since December 2013, mainly on the back of government-backed infrastructure spending. China’s industrial output rose by 7.6% in June from a year earlier, ahead of expectations, while retail sales growth also beat forecasts, up by 11% in June from a year earlier.

In Japan, strong first-quarter corporate earnings saw full-year profit upgrades flowing, but on the back of a political crisis that rocked the Abe government, the Nikkei index surrendered 0.5% for the month. The Hang Seng Index in Hong Kong was up 6%, the KOSPI in South Korea gained 0.5% and the Shanghai Composite Index was up 2.5%. In Australia, the S&P/ASX 200 barely moved (down 0.02%).

In local currency terms, Iron ore surged 20% in July, while West Texas Intermediate crude jumped 9% and Brent gained 9.9%, its best month since December 2016. Gold rose by 2.5%, while copper was up 2.6%.

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This information is current as at 31/07/2017.

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