United States
Surging oil prices raised concerns about central banks’ ability to control inflation, leading to a bond market sell-off. As the week progressed, fears of a U.S. government shutdown added to investor worries. The yield on the 10-year U.S. Treasury note briefly exceeded 4.6% on Wednesday. Still, it later dipped slightly following positive inflation data from the eurozone and the U.S., putting pressure on tax-exempt municipal and high-yield bonds.
The S&P 500 Index endured its fourth consecutive weekly decline, driven by rising interest rates that negatively impacted investor sentiment. Utilities suffered the most significant losses within the index, while energy stocks performed well. In contrast, the S&P MidCap 400 Index and the small-cap Russell 2000 Index, which have trailed large-caps this year, managed to secure modest gains.
In August, the core Personal Consumption Expenditures (PCE) index, closely monitored by the Federal Reserve and excluding the volatile food and energy sectors, saw a 3.9% increase compared to the previous year—marking the lowest annual inflation rate in nearly two years but falling short of the central bank’s 2% target. This latest figure reflects a slowdown from the previously revised 4.3% annual inflation rate recorded in July. On a month-to-month basis, core PCE inflation stood at 0.1%, below expectations. When considering all items, monthly inflation accelerated to 0.4% from 0.2% in July, primarily due to higher energy prices.
Despite recent manufacturing surveys indicating a decline in new orders, there was a month-over-month increase in durable goods orders and shipments in August. The headline orders rose by 0.2%, primarily driven by robust performance in the machinery sector, defying consensus expectations of a decline. Excluding transportation, durable goods orders saw a more significant increase of 0.4% compared to July. This metric, seen as a near-term indicator of the economy’s health, excludes the transportation category due to its potential to distort underlying trends, given the substantial price tags associated with aircraft and other equipment.
Europe
In local currency terms, the pan-European STOXX Europe 600 Index closed 0.67% lower, driven by concerns about prolonged higher interest rates and a weaker Chinese economy. France’s CAC 40 Index declined by 0.69%, Germany’s DAX slipped by 1.10%, and Italy’s FTSE MIB fell by 1.16%. The UK’s FTSE 100 Index also experienced a loss of 0.99%.
European government bond yields saw a broad increase as investors focused on the expectation of enduring higher interest rates in financial markets. Germany’s benchmark 10-year government bond yield briefly reached nearly 3%, a level not seen in over a decade, before retracting slightly on Friday. Italian bond yields advanced due to concerns about increased debt issuance by the government in the coming year to cover a more significant deficit. The work on the 10-year benchmark bond in the UK briefly surpassed 4.5% before retracting slightly on Friday.
Several European Central Bank (ECB) officials, including ECB President Christine Lagarde and Chief Economist Philip Lane, reiterated their commitment to maintaining a restrictive monetary policy to bring inflation back to the 2% target. ECB Executive Board member Frank Elderson noted that rates may not have peaked yet, with future monetary policy decisions dependent on incoming data. Austrian central bank Governor Robert Holzmann even suggested that persistent inflationary pressures could lead to further rate hikes.
Eurozone inflation in September increased by 4.3% annually, weaker than expected and the slowest pace in approximately two years. This marked an improvement from the 5.2% rate recorded in August. The initial estimate of inflation data also revealed a decrease in the core rate, which measures underlying inflation pressures by excluding food, energy, alcohol, and tobacco, to 4.5% from 5.3%.
Revised figures for the UK’s gross domestic product (GDP) showed that the economy grew faster than anticipated in the first quarter, with growth at 0.3% instead of the previously estimated 0.1%. The estimate for second-quarter GDP growth remained unchanged.
However, the property market in the UK continued to slow down, with data from the Bank of England indicating a decline in the number of approved mortgages for house purchases, dropping from 49,532 in July to 45,354 in August.
Japan
Japan’s stock markets experienced a decline, with the Nikkei falling by 1.7% and the broader TOPIX Index dropping by 2.2%. Concerns about the possibility of rising U.S. interest rates for an extended period and the surging oil prices influenced investor sentiment. However, there was a positive response from investors to the Japanese government’s announcement of a new economic stimulus plan. Additionally, a slowdown in core inflation in the Tokyo region supported the Bank of Japan’s steadfast commitment to its ultra-accommodative monetary policy stance as it pursues its inflation target.
The yen’s performance against the USD mostly ranged around JPY 148, briefly weakening to an 11-month low below JPY 149. This led to speculation that Japanese authorities might intervene in the foreign exchange market to bolster the yen, given their repeated statements about responding appropriately to rapid currency fluctuations. Nevertheless, Finance Minister Shunichi Suzuki denied having a specific trigger level in mind for U.S. dollar-Japanese yen exchange rates that would prompt intervention.
The 10-year Japanese government bond (JGB) yield increased from 0.74% to 0.76%, marking its highest level in over a decade. The Bank of Japan intervened in the market to purchase JPY 300 billion (USD 2 billion) worth of JGBs with maturities ranging from five to 10 years. This move followed the Bank of Japan’s adjusted yield curve control policy in July, allowing rates to rise more freely while effectively capping them at 1%.
Prime Minister Fumio Kishida outlined a new economic stimulus plan, the details of which will be finalised in October and funded through a supplementary budget. The plan aims to foster a positive cycle of capital investment, wage growth, and investment in human capital. It emphasises supporting long-term investments in growth sectors like semiconductors, batteries, and biotechnology. Additionally, extending a temporary subsidy, which had previously helped mitigate the impact of rising energy prices, into the following year is considered.
China
Chinese stocks declined during the shortened trading week as the absence of positive economic news weighed on investor confidence. Both the blue-chip CSI 300 Index and the Shanghai Composite Index registered losses for the week ending Thursday. Mainland Chinese stock markets remained closed on Friday, marking the beginning of a 10-day holiday for the Mid-Autumn Festival and National Day, with reopening scheduled for Monday, October 9. In Hong Kong, the benchmark Hang Seng Index recorded a 1.37% decline for the week ending Friday.
During the week, no official economic indicators were released in China. However, a private survey indicated a positive price trend, alleviating concerns about prolonged deflation. According to World Economics, their all-sector price index for China reached a 14-month high in September. The London-based data company, known for creating the widely used Purchasing Managers’ Indexes now owned by S&P Global, stated, “This suggests fears of Chinese price deflation leading to a Japanese-style period of very low or negative growth have been overstated. Over recent months, the signs of a growth revival in China are becoming more favourable.”
The World Economics survey is the latest data point signalling that China’s economy may have bottomed out after a period of deceleration following a brief post-lockdown recovery in the first quarter. Official data for August, released earlier in September, also indicated signs of stabilisation in the Chinese economy. Industrial production and retail sales outperformed year-on-year expectations, while unemployment unexpectedly decreased from July. However, fixed-asset investment growth fell short of expectations due to a sharper decline in property investment.
Market indices
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|
Weekly Index |
YTD Index |
|
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|
Index |
Local Currency |
Sterling Pound |
Local Currency |
Sterling Pound |
||
|
UK |
|
|
|
|
||
|
FTSE 100 Index |
-0.89% |
-0.84% |
5.39 % |
5.39 % |
||
|
US |
|
|
|
|
||
|
S&P 500 Index |
-0.72% |
-0.23% |
12.65% |
11.02% |
||
|
EU |
|
|
|
|
||
|
Euro Stoxx 50 |
-0.90% |
-1.06% |
9.07% |
6.63% |
||
|
Asia |
|
|
|
|
||
|
Nikkei 225 Index |
1.68% |
1.77% |
24.43% |
7.17% |
||
|
MSCI Emerging Markets Index |
-0.72% |
-0.66% |
4.07% |
0.37% |
||
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