Solid earnings, easing around inflation worries and some repricing around the Fed, plus a weaker dollar, has enabled a strong bear market rally. The S&P 500 can probably still hit 4,200, but I wouldn’t give it too much beyond that, even though the market could be happy to ride this bear market rally narrative for the summer. No one cares if it’s a technical recession or not.

The market is way too complacent still because the Fed is not done yet. Data released on Friday showed that inflation is far from tamed. The personal consumption expenditures price index jumped 6.8% in June, whilst the core reading accelerated to 4.8%.  This data only underscores the need for the Fed to keep on. “I’m convinced we’re going to have to do more in terms of interest rate increases,” Atlanta Fed President Raphael Bostic said ahead of the data. Meanwhile markets repriced the chances of another 75bps hike in September to one-in-three from one-in-four.  

The Fed hiked last week by 75bps but chair Powell pointed to slowing spending and hinted at cuts some time in the future. The market is desperate for the Fed to pivot but it’s happening yet. More pain to come, albeit the University of Michigan one-year-ahead consumer inflation expectations did ease back to 5.2% from 5.3%…hardly a big improvement when the absolute level remains so elevated and actual inflation remains higher. 

The Fed’s Kashkari, an arch dove, said: “Whether we are technically in a recession or not doesn’t change my analysis … we definitely want to see some slowing … We’re going to do everything we can to avoid a recession, but we are committed to bringing inflation down, and we are going to do what we need to do.” 

The Bank of England this week is likely to raise rates by 50bps as it plays catch-up with other central banks. The BoE started early by it has been far too incremental in its approach to policy adjustment, creating a credibility gap. Meanwhile soaring gas prices mean inflation is set to get worse. Sharp hikes by the Fed and ECB in July make it all the more likely that it will pull the trigger on an outsize rate hike, as much to restore credibility – a very important commodity – as anything else.  

Stocks started the month on a fairly steady note on Monday morning with some limited gains for the main bourses across Europe and a slightly weaker open for US futures after a strong week to end July. The dollar remains on the back foot, helping risk sentiment. Gold trades higher but is facing stiff resistance around the $1,766 area. Oil was a bit weaker but within the recent range as manufacturing surveys disappointed.

Data continues to underwhelm: China’s Caixin manufacturing PMI disappointed at 50.4 vs 51.5 expected. Japan’s factory activity declined to a 10-month low, whilst South Korea’s contracted for the first time in almost two years. Italy’s manufacturing PMI fell into contraction territory at 48.5, whilst German retail sales declined 8.8% in June from a year before.

Solid earnings from HSBC added 25pts to the FTSE 100 as shares in the lender rose over 6% in early trading. Reporting $5bn in profits for the second quarter, well ahead of expectations, the bank pledged to restore the dividend to pre-corona levels. Reported profit before tax for the first half decreased by $1.7bn to $9.2bn as it booked a $1.1bn impairment on credit losses due to the economic outlook and inflation. But expenses were down 4% and net interest income is higher, reflecting the rising rate environment.  

Meanwhile, despite some concerns about the economic outlook, management said they would target a return on tangible equity of at least 12% from 2023 onwards. Powering up the dividend is a clear pushback against calls by Ping An to break up the business, whilst the RoTE target is a bullish call that should help assuage investors’ concerns. 

There was also a 6% pop for Pearson shares as it reported a 22% rise in adjusted operating profit. Management also said at least £100m of further efficiencies have been identified, which will be delivered in 2023. This in turn means the company expects to hit its margin improvement target next year, two years earlier than planned.