Markets Mixed as Data Diverges, Trade Hopes Rise

Global equity markets navigated a week shaped by shifting geopolitical tides, central bank signals, and key economic data releases. Sentiment fluctuated, with initial optimism from easing tensions and dovish interpretations giving way to caution based on mixed economic signals before ending with a boost from trade developments. Bond markets remained relatively stable but reacted to data surprises, complicating the outlook for monetary policy around the world.

Key Takeaways:

• US stocks gained, supported by easing tensions and durable goods orders, despite softer GDP and consumer spending data.
• Canadian equities faced pressure from rising inflation and a shrinking economy, clouding the Bank of Canada’s rate cut path.
• European markets declined, weighed down by weak business surveys and M&A hurdles.
• Emerging markets saw strong gains on renewed optimism in US-China trade talks.
• Bond yields saw modest changes, reflecting diverse economic data signals across regions.

Global Equity Markets See Divergent Performance

Equity indices showed varied performance this week, reacting differently to regional economic conditions and global events.

In the United States, markets initially rose on easing Middle East tensions and comments from Federal Reserve Chair Powell signaling patience on rate cuts. However, momentum slowed midweek following downward revisions to GDP growth and weak consumer spending data. A rebound in durable goods orders offered some support, leading the S&P 500 Index to finish up 3.26% for the week. [Link: How Economic Data Influences Stock Markets]

Canadian equities faced headwinds. A surprise uptick in May inflation, combined with a second consecutive monthly contraction in GDP, raised concerns about the health of the economy and complicated the Bank of Canada’s policy outlook. The S&P/TSX Composite Index posted a modest gain of 0.52%.

European markets saw early support from subdued inflation reports and defense spending commitments. However, gains were erased by weak Purchasing Managers’ Index (PMI) data, continued manufacturing contraction, and regulatory challenges impacting key merger and acquisition (M&A) deals. The Bloomberg Developed Markets ex N. America Large & Mid Cap Price Return Index declined 3.04%.

Emerging markets ended the week strongly, gaining 3.00% (Bloomberg EM Large & Mid Cap Price Return Index). Optimism surged late in the week following positive developments in US-China trade negotiations, including a rare earth export framework and hints of eased tech restrictions. This boosted global risk appetite and drove significant gains.

Weekly dashboard showing market index returns for US, Canada, Europe, and Emerging Markets alongside key bond yield changes.

Bond Yields React to Mixed Economic Signals

Fixed income markets experienced volatility, with yields shifting in response to geopolitical developments and incoming economic data, which presented a complex picture for central bank policy paths.

Early in the week, yields initially fell on geopolitical concerns before rebounding as tensions eased. US Treasury yields moved higher midweek on stronger durable goods data and a slight increase in core PCE inflation, although the Fed’s dovish tone and soft GDP revisions capped the upward movement. [Link: Understanding Bond Yields]

In Canada, the combination of sticky inflation and weak GDP data created conflicting signals. Bond yields rose initially on the inflation surprise but retreated as the GDP contraction data suggested economic weakness. European yields generally climbed, supported by defense spending plans and low inflation figures.

The 2-year and 10-year U.S. Treasury yields fell 22 and 15 basis points (bps), respectively. In Canada, the 2-year yield dropped 5 bps, while the 10-year yield edged up 1 bp. (Note: Bond yields and prices move inversely).

Despite recent Fed commentary, the preferred Personal Consumption Expenditures (PCE) price index remains near two-year lows, potentially strengthening the case for the Fed to eventually focus more on employment conditions. Credit spreads remained stable this week, trading within a tight range and supporting new bond issuance. However, potential risks like ongoing budget negotiations in Washington, a July 9 tariff deadline, and future soft economic data could introduce volatility in July.

Key Economic Data Releases

Several significant economic reports were released this week, providing crucial insights into the health of major economies.

Canadian May Inflation Holds Steady at 1.7% as Economy Shrinks

Inflation in Canada remained unchanged in May, with the Consumer Price Index (CPI) rising at an annual rate of 1.7%, according to Statistics Canada (StatCan). This stability might ease some concerns at the Bank of Canada regarding accelerating core inflation influenced by trade tensions.

However, the report also highlighted a concerning trend in economic activity. Real Gross Domestic Product (GDP) decreased by 0.1% in April, below StatCan’s initial estimate. A preliminary estimate for May suggested another 0.1% decline, marking a second consecutive monthly contraction. Furthermore, the manufacturing sector saw its largest decline in four years, contracting by 1.9%. [Link: Canadian Economic Indicators]

Factors contributing to stable May inflation included smaller price increases for rent, food, and mortgage interest costs compared to the prior month. Gasoline prices were also significantly lower year-over-year, although they rose month-over-month.

U.S. Consumer Spending Falls in May While Prices Tick Up

US consumer spending unexpectedly fell by 0.1% in May, according to the Bureau of Economic Analysis (BEA), following a 0.2% gain in April. This decline suggests that the boost from consumers making purchases ahead of anticipated tariffs faded. Consumer spending is a critical component of the US economy, accounting for over two-thirds of activity.

On the inflation front, the Personal Consumption Expenditures (PCE) Price Index increased by 0.1% in May, matching April’s rise. On a year-over-year basis, PCE inflation rose to 2.3% in May from 2.2% in April. Excluding volatile food and energy components, the core PCE Price Index increased by 0.2% last month, following a 0.1% rise in April. Core inflation year-over-year reached 2.7% in May, up from 2.6% in April.

German Business Sentiment Climbs as Expectations Brighten

Business confidence in Germany improved in June, with the Ifo Institute’s business-climate index rising to 88.4 from 87.5 in May, exceeding economist expectations of 88.0. Indexes across all four major sectors (manufacturing, services, trade, and construction) showed improvement.

The rise was primarily driven by brighter expectations for the next six months, likely boosted by cooling trade tensions between the EU and the US following a temporary suspension of proposed tariffs. Planned fiscal stimulus from Germany’s new government, focusing on defense and infrastructure spending, also contributed positively to the outlook. Additionally, expectations of further interest rate cuts from the European Central Bank by the end of 2025 supported sentiment. The Ifo report aligns with recent business surveys indicating a slight rebound in Germany’s manufacturing sector, with new orders seeing their fastest growth in three years. [Link: European Economic Outlook]

Outlook and Implications

This past week highlighted the complex interplay of global factors influencing financial markets. While easing geopolitical tensions and progress on trade provided tailwinds, particularly for emerging markets and initially the US, mixed economic data presented challenges for central banks and underscored regional divergences.

The US economy shows resilience in some areas like durable goods but faces questions regarding consumer spending strength. Canada’s economy is showing signs of contraction alongside persistent inflation, creating a difficult scenario for the Bank of Canada. Europe continues to grapple with manufacturing weakness, though German sentiment offers a glimmer of hope tied to trade and potential fiscal stimulus.

Looking ahead, investors will closely watch for further developments in trade negotiations, upcoming inflation and GDP data from major economies, and any new signals from central banks regarding their monetary policy intentions. Geopolitical risks, though temporarily subsided, remain a background factor. The divergence in economic performance across regions suggests that market trends may continue to be segmented in the near term.

To dive deeper into these topics, explore our related articles: [Link: Understanding Inflation’s Impact], [Link: Guide to Central Bank Policies].