The United States equity markets delivered a mixed performance across the major indexes last week, with the technology heavy Nasdaq Composite and the broader S&P 500 Index coming under notable pressure as large cap technology and artificial intelligence related shares experienced renewed weakness and sold off considerably. The smaller cap Russell 2000 Index and the blue chip Dow Jones Industrial Average managed to push higher, gaining just over one percent and just over half a percent respectively. When measured through the lens of the Russell index family, large cap value stocks delivered substantially stronger returns than their growth oriented counterparts, outperforming by nearly three and three quarter percentage points over the course of the week. The equal weighted version of the S&P 500 Index also managed to outpace the traditional market capitalization weighted version of the same index by a meaningful margin, suggesting that performance during the week was somewhat more evenly distributed across companies of varying sizes rather than being concentrated among the very largest constituents.
On the economic data front, the Bureau of Economic Analysis released its latest reading on personal consumption expenditures inflation, which showed that the headline price index climbed by four tenths of a percent during May, precisely matching the pace seen in April. The core version of this measure, which strips out the more volatile categories of food and energy to provide a cleaner read on underlying price pressures, rose by three tenths of a percent, also holding steady compared with the prior month. When looking at these figures on a year over year basis, however, the picture became somewhat more concerning, as headline personal consumption expenditures inflation accelerated by nearly a third of a percentage point to reach four point one percent, the highest reading since April of 2023. The core measure also ticked upward to three point four percent on an annual basis, reaching its highest level since October of 2023 and reinforcing the sense that inflationary pressures remain stubbornly persistent even as policymakers have worked to bring them under control. Despite these elevated price pressures, American consumers continued to demonstrate considerable resilience, as both personal income and personal spending each rose by seven tenths of a percent during May, both coming in ahead of what analysts had anticipated. The increase in spending was relatively broad in its composition, with particularly notable contributions coming from financial services and insurance, healthcare, housing and utilities, and energy related goods.
Alongside the inflation and spending figures, data on business activity provided a more encouraging picture of economic momentum. The S&P Global Flash Purchasing Managers' Index composite output reading for June climbed to fifty two point two from fifty one point five in May, marking the third consecutive month of improvement and reaching its highest level in five months. Both the services and manufacturing components contributed to this improvement, with the services index rising to fifty one point three from fifty point seven and the manufacturing gauge climbing to fifty five point seven, its strongest reading since May of 2022. However, not everything in the report pointed in a positive direction, as employment across the private sector softened for the second consecutive month, with companies continuing to prioritize cost control in an environment of elevated input prices and uncertainty about the future. Supply chain disruptions also became more widespread during the period, driven in part by tariff related complications and ongoing instability stemming from the conflict in the Middle East, while input price inflation continued to run at historically high levels. Separately, the Bureau of Economic Analysis revised its estimate of first quarter real gross domestic product growth upward to an annualized rate of two point one percent from its earlier estimate of one point six percent, a meaningful upgrade driven primarily by a downward revision to import figures, which are subtracted from the overall GDP calculation. This was partially counterbalanced by a downward revision to consumer spending during the same period.
In the bond markets, United States Treasury securities advanced during the week, with yields declining across most maturities as oil prices fell back and the May personal consumption expenditures data came in broadly in line with what investors had been expecting. The yield on the benchmark ten year Treasury note dropped below four point four percent for the first time in more than a month, reflecting increased demand for government bonds. Investment grade corporate bonds also generated positive returns during the week, and new issuances in that market were met with strong demand, with deals on average being oversubscribed by investors. The high yield segment of the credit market faced more difficult conditions, however, with traders noting pressure stemming from a combination of monetary policy uncertainty, concerns about valuations in artificial intelligence driven equity markets, heavy new bond supply hitting the market, decelerating fund inflows, and a broader shift toward risk aversion among investors.
Turning to Europe, the pan European STOXX Europe 600 Index ended the week essentially unchanged, eking out a gain of just four hundredths of a percent in local currency terms. While markets began the week on a positive note, a broad selloff in global technology stocks on Friday, driven by concerns about elevated valuations in artificial intelligence related companies, dragged on performance and erased much of the earlier progress. Among the major national indexes, Germany's DAX experienced the sharpest decline, falling one point two six percent over the course of the week, while France's CAC 40 Index shed about four tenths of a percent and Italy's FTSE MIB fell three percent. The United Kingdom's FTSE 100 Index stood out as a notable outperformer, climbing one point four percent over the same period.
On the inflation front in Europe, the European Central Bank's latest survey of consumer expectations provided some modestly encouraging news. Eurozone consumers indicated that they expect inflation over the next twelve months to come in at three point five percent, down from prior readings and representing the lowest level in three months. The same survey also found that consumers expect the broader economy to contract slightly in the year ahead, though this represented an improvement from the even deeper contraction that had been anticipated in the previous month's survey. Adding to the more hopeful inflation picture, oil prices that had traded back toward levels prevailing before the outbreak of the Middle Eastern conflict could potentially reduce the pressure on the European Central Bank to pursue further interest rate increases. Composite purchasing managers' index data for the eurozone showed a modest improvement in June, with the flash reading rising to forty nine point five, slightly above both the May reading and the level that forecasters had expected, though the figure still remained below the threshold of fifty that separates economic expansion from contraction. Germany told a somewhat more troubling story, with its own composite index falling to forty eight in June, below forecasts and marking the third straight month of declining private sector activity, with businesses citing worsening economic conditions and heightened uncertainty about the outlook.
A significant political development in the United Kingdom added to an already complex backdrop, as Prime Minister Keir Starmer announced his resignation following several months of mounting political pressure. The governing Labour Party now faces the task of selecting a new leader, with Andy Burnham currently considered the frontrunner for the position. Meanwhile, survey data from the Confederation of British Industry painted a bleak picture of the retail sector, with sales volumes falling sharply in June amid weak consumer confidence and rising prices. The weighted balance for retail sales dropped to fifty four in the year to June, deteriorating from forty six in May. Manufacturing also struggled, with the total order book for the sector falling to its lowest level since 2020.
Japanese equity markets also suffered losses during the week, with the Nikkei 225 Index declining two point six five percent and the broader TOPIX Index giving back slightly more than two percent. While technology and artificial intelligence related stocks initially received a boost from optimistic guidance from leading American chipmakers, the subsequent global technology selloff triggered profit taking in those same shares and weighed on the overall market. Currency markets remained tense, with investors watching closely for signs that Japanese authorities might intervene to support the yen, which continued to weaken and approached the upper end of the one hundred and sixty one range against the United States dollar. Falling oil prices provided some relief for Japan, which relies heavily on imports of Middle Eastern energy, reducing concerns about both energy costs and inflationary pressures. Demand for Japanese government bonds was supported by this backdrop, with the yield on the ten year instrument declining to two point six percent from two point six four percent. Inflation data from Tokyo showed the core consumer price index rising one point six percent year over year in June, matching expectations and accelerating from one point three percent in May, with higher water service fees following the lapse of government subsidies being the primary driver. This marked the first acceleration in Tokyo consumer inflation in eight months and reinforced market expectations that the Bank of Japan will continue on its path of gradually raising interest rates. Governor Kazuo Ueda, speaking through his deputy, reiterated that the central bank sees upside risks to inflation relative to its two percent target and intends to continue adjusting monetary policy in response to evolving economic and financial conditions. Prime Minister Sanae Takaichi announced a sweeping fiscal expansion program targeting long term economic growth, outlining a public private investment roadmap worth approximately three hundred and seventy trillion yen through the year 2040, covering seventeen strategic sectors including artificial intelligence and semiconductors.
In China, equity markets also retreated over the week after an early rally in artificial intelligence and semiconductor related shares gave way to the same broader regional technology selloff that affected markets elsewhere. The CSI 300 Index fell nearly one and a half percent while the Shanghai Composite Index declined by a similar margin. Hong Kong markets suffered considerably more, with the Hang Seng Index tumbling more than five percent, as weakness among large internet companies compounded the broader decline in Asian technology shares. The divergence between mainland and Hong Kong market performance reflected differences in index composition, with mainland Chinese benchmarks carrying greater exposure to artificial intelligence infrastructure and semiconductor companies, while Hong Kong's index remains more heavily weighted toward internet platforms and financial companies. The People's Bank of China announced that it would begin conducting overnight reverse repurchase operations at the end of June through a new liquidity management instrument intended to improve short term liquidity conditions and strengthen the transmission of monetary policy decisions through the financial system. Separately, the central bank left both the one year and five year loan prime rates unchanged, as widely anticipated, with the one year rate remaining at three percent and the five year rate at three point five percent. These rates have now been held steady for thirteen consecutive months. At the World Economic Forum's Summer Davos gathering in Dalian, Premier Li Qiang defended China's technological and industrial position, pushed back against claims that Chinese export competitiveness is primarily a product of state subsidies, and reaffirmed Beijing's commitment to innovation, advanced manufacturing, and greater openness of the Chinese economy.
Elsewhere across global markets, South Korean equities suffered one of the sharpest weekly declines of any major market, with the KOSPI Composite Index losing more than seven percent as a dramatic reversal in artificial intelligence and memory chip related shares erased earlier gains. The market had begun the week on a strong footing, supported by significant advances in shares of SK Hynix and Samsung Electronics, but selling pressure intensified sharply as investors grew increasingly uncomfortable with what they perceived as stretched valuations, heavy retail participation, and the role of leveraged financial products in amplifying market movements. Trading halts were triggered on two separate occasions during the week as leveraged single stock exchange traded funds tied to the two major chipmakers, combined with high levels of retail margin debt, appeared to magnify swings at the broader index level. Romanian assets came under pressure amid a deepening political crisis, as the failure of a prime ministerial nominee to secure parliamentary approval prolonged a governance impasse that has threatened the country's ability to access European Union recovery funds and advance the fiscal reforms necessary to unlock those funds before an August deadline. With multiple political factions putting forward competing candidates and neither gaining a clear majority, the risk of early elections increased, raising the prospect of gains for far right parties in the polls. These concerns weighed on investor sentiment at a time when Romania already faces one of the widest budget deficits in the European Union and growing questions about the sustainability of its investment grade credit rating.