The investor shift from Big Tech to smaller stocks in July gave the Russell 2000 index one of its best months in years, marking its biggest outperformance against mega caps since 2001. However, some of the gains have already started to unwind.
The small-cap benchmark rose 10.2 percent last month as investors grew disenchanted with the outlook for several of the "Magnificent Seven" technology companies that had driven blue-chip stocks to record highs this year. In contrast, the Russell 2000 is still over 10 percent below its 2021 record high. Smaller companies, which typically have higher debt burdens, are expected to benefit from interest rate cuts.
Signals from the Federal Reserve on Wednesday indicating potential rate cuts as soon as September helped small caps. However, the index fell sharply on Thursday and Friday, partly due to an unexpectedly weak job creation rate and a larger-than-forecast rise in the unemployment rate. This has heightened fears that the US economy is weakening faster than the Federal
Reserve will act to support it, potentially leading to a "hard landing" that would adversely affect smaller companies.
Investors will gain more insight into whether China is moving away from last year's deflation with upcoming inflation data next week. According to a Reuters poll, the consumer price index in the world’s second-largest economy is expected to have risen 0.4 percent year-on-year in July, up from June’s 0.2 percent increase and higher than the readings in April and May.
While still subdued, Chinese inflation has remained positive each month this year since January. Last year’s frequent deflation contrasted sharply with high price growth and interest rate increases in other major economies.
Policymakers in Beijing are under pressure to further support the economy, especially given a three-year property slowdown that has weighed heavily on consumer confidence and driven new home prices down at increasing rates. However, the Communist Party’s flagship policy meeting last month ended without significant announcements of support for the struggling property sector.
Last month, authorities cut key lending rates that underpin corporate lending and mortgages by 0.1 percentage points. Official data showed retail sales rose just 2 percent in June, far below expectations.
Analysts at UBS, forecasting a 0.4 percent rise in CPI for July, expect a “continued large decline” in property sales and new starts for the same month.
Will Australia Need to Raise Interest Rates?
August looms as a critical moment for the Reserve Bank of Australia (RBA) in its battle against inflation, with recent disappointing data suggesting a potential interest rate rise.
The RBA, which has held rates at 4.35 percent since November, has indicated its patience is being tested as inflation proves more stubborn than anticipated. The Australian Bureau of
Statistics reported a consumer price index of 3.8 percent in June, well above the 2 to 3 percent target range. On a quarter-on-quarter basis, the index rose 1 percent, slightly above forecasts, with housing and food prices, particularly fruit and vegetables, rising more than 6 percent—the biggest increase since 2016.
Despite this, the data was better than some had feared. Economists suggested that if the data had reached 4 percent or higher, a rate rise would have been certain. As it stands, the RBA’s decision remains uncertain.
Investment bank Morgan Stanley no longer views a rate rise as likely for August, although it expects the RBA to maintain a hawkish tone. It also suggests that not raising rates now indicates an extended pause is likely before potential cuts next year.
The Commonwealth Bank of Australia agreed that while a rate cut is now likely off the table, “it is too early to shift the tone.” In the context of the UK cutting rates and Japan raising them, analysts expect the RBA to hold off on any immediate changes.
