The interest rate decisions of the central banks were in line with expectations. The ECB and also the U.S. Federal Reserve raised the key interest rate once again and thus continued the record tightening of monetary policy. All expectations are that this will be the last interest rate hike of the year for the U.S. Federal Reserve. Federal Reserve Chairman Jerome Powell did not give any clear guidance on the future path of interest rates anymore. Data dependency is now key in determining the future path of interest rates. The FED knows that the lagging effects of its monetary policy are yet to manifest themselves, and thus wants to wait for further economic data for now (see FOCUS). The ECB is likely to face a similar situation. Inflation is running in the desired direction on both sides of the Atlantic thanks to the base effect and weak demand from Asia (China). However, despite the weakness in China, the International Monetary Fund (IMF) has raised its economic forecasts for the current year 2023 and left them unchanged at 3% growth for 2024. Meanwhile, the Bank of Japan caused a surprise by making the target range for long-term interest rates more flexible. The formal target for 10-year interest rates remains at 0%, but the market is to be allowed to rise to 1%. With this, the Japanese central bank is also moving to a normalization course after a long hesitation. Meanwhile, the Chinese authorities have announced initial stimulus measures for their flagging economy. The focus is primarily on consumption and expansion of key infrastructure. At the corporate level, earnings reports for the second quarter have so far been surprisingly good.
From the perspective of Swiss franc investors, the monthly development on the international stock markets was largely a treading water. On the leading US stock exchange, around half of the companies have so far presented their quarterly figures for the second quarter of 2023. Overall, 80% of the companies were able to exceed on the basis of profit and 64% on the basis of sales. In the run-up to the quarterly reports, however, estimates were again lowered, so that the positive surprises are somewhat relativized. For Q2, profits are expected to fall again by 7%, marking the biggest decline since 2020. The picture in Europe is similar at the earnings level. In the still young reporting season, however, expectations in terms of sales have not quite been met so far. There were two prominent disappointments from the luxury sector. LVMH disappointed market participants due to declining US sales figures and lost about -2% against the stable trend of the overall market. Richemont also failed to meet high sales expectations (-7.5%). In the USA, META and Alphabet.com flourished thanks to solid advertising and cloud business.
Yields on global bond markets trended marginally higher. However, the Bank of Japan's regime change caused 10-year yields to jump to 0.6%. This jump was already too strong in the eyes of Japan's monetary watchdogs, so that on the last day of July another 300 billion yen intervention was launched. The yield curve structure remains strongly inverted. There are already opinions that want to interpret the inversion differently than usual, namely that it is a sign of falling inflation and higher stock prices, and not a widely recognized signal of recession. Time will tell whether such a "nirvana scenario" is possible.
The increasingly confirmed hopes of Chinese stimulus caused commodity prices to boom. In particular, the prices of fossil fuels experienced a revival. The price of oil traded 16% higher in July. Precious metals such as gold and silver gained 2-3%. The energy component will again shape future inflation figures and provide for possibly more persistent price pressure than expected.
The financial markets have firmly settled on the "soft landing" scenario. In other words, investors expect inflation to fall and the labor market to remain strong despite record high interest rate hikes. The likelihood of this scenario has been increasingly underpinned in recent weeks with steadily good data. So far, however, a soft landing has historically only rarely succeeded. In the 1990s, Alan Greenspan managed to tame inflation after aggressive rate hikes without causing significant stress in the labor market. It is the global constellation that continues to make us somewhat skeptical about the perfect scenario depicted by the market. After all, if the Chinese stimulate the economy extensively, this will inevitably increase inflationary pressure in the West, which is likely to prompt central banks to tighten interest rates further. The harbinger is the renewed strength of energy prices. For the moment, however, the market does not seem to regard this risk as very likely. On the other hand, a recovery based on the Chinese economy could bring more cyclical stocks back into the focus of investor interest, after only the topic of artificial intelligence has mainly caused big jumps in technology stocks in recent weeks. In seasonal terms, August and September are now historically rather difficult stock market months and the mood of private and institutional investors has reached a contrary level.