Markets last week 04/09/2023

United States

Stocks experienced a surge in value as concerns over inflation began to ease. Despite closing out its first month in the red since February, the major benchmarks saw substantial weekly gains. This positive trend was fueled by promising developments on the inflation front, primarily driven by a drop in longer-term interest rates throughout the week. This rate reduction particularly benefited growth stocks, as it lowered the implied discount on future earnings. Furthermore, smaller-cap stocks outperformed their larger counterparts, narrowing the considerable year-to-date gap.

Trading volumes saw an uptick towards the end of the month, though overall market activity remained subdued as the summer vacation season drew to a close. Additionally, markets were scheduled to be closed on the upcoming Monday in observance of the Labor Day holiday.

Interestingly, the week seemed to be one in which negative economic news was viewed as positive for stock prices, largely due to its implications for interest rates. For instance, on Tuesday, the S&P 500 Index posted its most significant one-day gain since June following the unexpected drop of 338,000 job openings in July, marking their lowest level since March 2001. Job quits considered a more reliable indicator of labour market strength by some, also decreased notably.

The closely watched nonfarm payrolls report on Friday further confirmed the easing labour market conditions. The Labor Department reported an addition of 187,000 jobs in August, slightly above consensus expectations. However, gains for the preceding two months were revised down by a combined total of 110,000. Average hourly earnings for the month also only rose by 0.2%, slightly below expectations. Perhaps most notably, the unemployment rate rose from 3.5% to 3.8%, reaching its highest level since February 2022, as 736,000 people re-entered the job market. The labor force participation rate also hit 62.8%, its highest level since the pandemic began in February 2020.

Despite the slowing labour market, optimism seemed to grow regarding the possibility of the economy avoiding a significant slowdown in 2023, often referred to as the “no-landing scenario.” On Thursday, the Commerce Department reported a substantial 0.8% increase in personal spending in July, surpassing expectations and contrasting with a 0.2% rise in consumer prices during the same month. On Friday, the Institute for Supply Management reported that its measure of manufacturing activity, although still indicating a sector contraction, unexpectedly reached its highest level since February. Additionally, a gauge of overall business activity in the Chicago region exceeded expectations.

Expectations for the Federal Reserve’s monetary policy also saw an upward trajectory. During a conference in South Africa, Atlanta Federal Reserve Bank President Raphael Bostic expressed confidence that the current interest rate level was “appropriately restrictive” and on track to bring down the inflation rate to the Fed’s 2.0% target. Combined with the encouraging inflation and job data, Bostic’s remarks bolstered hopes that the Fed would abstain from raising rates further this year. The probability of the Fed maintaining the status quo for the remainder of the year, as measured by the CME FedWatch tool, increased significantly during the week, rising from 44.5% to 59.8%.

Short-term Treasury yields witnessed a notable decline throughout the week in the fixed-income market. However, the benchmark 10-year U.S. Treasury note yield experienced a sharp increase on Friday morning, resulting in a modest decrease for the week. It was a relatively calm week in the corporate bond markets, with no primary issuances and generally light trading activity.


In local currency terms, the pan-European STOXX Europe 600 Index closed with a 1.49% increase, driven by optimism that interest rates were approaching their peak and that any potential recession would likely be brief and shallow. European stocks also received a boost from China’s efforts to stimulate its economy, contributing to gains in major stock indexes across France, Germany, Italy, and the UK.

European government bond yields declined as core inflation data and comments from policymakers hinted at the European Central Bank (ECB) nearing the end of its monetary policy tightening cycle. Yields on 10-year government bonds issued by France and Germany trended lower, and softer economic data pushed the yield on UK 10-year sovereign bonds to near one-month lows.

Regarding economic indicators, the annual inflation rate in the eurozone remained stable at 5.3% in August, according to preliminary estimates from Eurostat. This figure slightly exceeded economists’ expectations of 5.1%, as polled by FactSet. However, core inflation, which excludes volatile food and energy costs, slowed as anticipated, registering at 5.3%, reflecting a 20-basis-point improvement from July.

The minutes from the ECB’s July meeting highlighted the robust labour market in the euro area and suggested the possibility of a soft landing for the slowing eurozone economy. The seasonally adjusted unemployment rate held steady at a historic low of 6.4% in July, in line with consensus forecasts.

In Germany, consumer price inflation experienced a slight slowdown in August, with a year-over-year rate of 6.1%, matching the 14-month low observed in May. Additionally, retail sales declined by 0.8% sequentially in July, contrary to the 0.5% decline anticipated by economists surveyed by FactSet.

Meanwhile, in the UK, data from the Bank of England revealed a 10% drop in the number of approved but incomplete home loans in July. Furthermore, according to mortgage lender Nationwide, UK house prices experienced a notable 5.3% decline in August, marking the largest drop since July 2009.


Japan’s stock markets recorded gains throughout the week, with the Nikkei 225 Index surging by 3.4% and the broader TOPIX Index showing a 3.7% increase. This positive momentum was attributed to weaker-than-expected U.S. economic data releases, fueling expectations that the U.S. Federal Reserve might be nearing the end of its interest rate hike cycle, which bolstered investor sentiment. Additionally, investors welcomed China’s latest efforts to stimulate its markets and economy.

The 10-year Japanese government bond yield inched lower, moving from 0.64% at the previous week’s close to 0.63%. The Bank of Japan (BoJ) announced its intention to conduct bond-buying operations one day ahead of its 10-year notes auction scheduled for the week starting September 4, which exerted downward pressure on yields.

Despite a strengthening yen, reaching approximately JPY 145.4 against the U.S. dollar compared to JPY 146.4 the previous week, ongoing concerns about the yen’s historical weakness continued to fuel speculation about potential interventions by Japan’s monetary authorities in the foreign exchange markets to support the currency.

To address the challenges posed by record-high fuel prices on households and businesses, Japan’s government unveiled measures to alleviate the impact of soaring gasoline costs. Additionally, the government extended its subsidy program for oil wholesalers, prolonging it beyond September until the end of the year. The weak yen contributed to higher gas prices, but government subsidies helped keep overall inflation levels in check, thereby supporting the argument for the BoJ to maintain its accommodative stance. BoJ Board member Toyoaki Nakamura emphasised the need for persistent monetary easing to pursue the central bank’s inflation target and suggested that any policy shift would require time.

On the economic front, Japan’s unemployment rate unexpectedly rose to 2.7% in July compared to the previous month, defying expectations of a 2.5% increase. Labour demand weakened, with a decline in manufacturing sector job openings.

Concerns about a global economic slowdown, particularly in China, dampened Japanese companies’ capital expenditures from April to June. Capital expenditures grew by 4.5% year-on-year, marking the lowest annual gain in five quarters. Many companies became more cautious about increasing investments in plants and equipment, largely due to negative developments in the Chinese property sector, as China is Japan’s largest trading partner.


Chinese equities experienced an uptick as the government initiated a series of stimulus measures to rejuvenate the economy. The blue-chip CSI 300 Index and the Shanghai Composite Index posted weekly gains. In Hong Kong, the Hang Seng Index increased for the week until Thursday, as financial markets remained closed on Friday due to an approaching typhoon.

The previous Friday, China’s central bank reduced the foreign currency deposits that domestic banks must hold as reserves. This move saw the foreign exchange reserve requirement ratio decrease from 6.0% to 4.0%, effectively freeing up additional foreign currency within the local market for purchasing the renminbi currency. The renminbi had fallen to its lowest level against the U.S. dollar since 2007 in August. The central bank’s action followed closely on the heels of China’s financial regulator announcing a nationwide reduction in minimum down payments for homebuyers and encouraging lenders to lower rates on existing mortgages.

These multiple policy announcements underscored Beijing’s growing concern about the state of the economy, which has faced headwinds throughout the year. Factors such as disappointing economic data, deflationary pressures, elevated youth unemployment, and a deepening crisis in the debt-heavy property sector have eroded confidence in China’s economic outlook.

Country Garden Holdings, previously China’s largest sales developer, revealed the possibility of debt default if its financial performance continued to deteriorate. Meanwhile, China Evergrande Group, another major developer already in default, reported further losses and postponed credit meetings scheduled for the week. Concerns about contagion from the real estate sector issues to other segments of China’s financial system, including the less regulated trust industry, have escalated.

While China’s economy has faced challenges in rebounding from the pandemic-related restrictions lifted in late 2022, the recent pressures in the property sector and shadow banking system do not pose an immediate systemic risk. This is due to the government’s commitment to its “common prosperity agenda.” However, with China reporting only 0.8% quarter-on-quarter economic growth as of June and recent trade activity moderating from cyclical highs, the country appears poised for a period of below-trend growth. The situation is being closely monitored, particularly regarding property sector developments and potential spillovers to other sectors. In the short term, weak economic growth and low inflation provide policymakers with room to further ease monetary policy.

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