United States
The major stock market indices closed with a mixed performance, with value stocks taking the lead as U.S. benchmark West Texas Intermediate oil prices surged above $90 per barrel for the first time since November 2022. Notably, large-cap stocks outperformed their smaller counterparts.
Conversely, the technology and growth stock sectors experienced a slowdown following Apple’s product launch event on Tuesday, which unveiled a price increase for its flagship iPhone 15. The products received a mixed reception, contributing to a subdued sentiment in the technology sector throughout the week. However, the broader market received a boost from the most extensive initial public offering of 2023, as shares of a UK microchip designer commenced trading on the Nasdaq, resulting in an impressive first-day price surge.
On Wednesday, the highly anticipated August Consumer Price Index (CPI) data release revealed that the Federal Reserve had progressed in combating inflation. However, the rise in energy prices may prompt the central bank to consider further tightening monetary policy. The headline CPI numbers showed the most substantial monthly increase since August 2022, primarily driven by expected higher gasoline prices. The core CPI, excluding food and energy, saw a slightly higher increase than anticipated, but the markets reacted calmly to the news.
Similarly, Thursday’s release of the August Producer Price Index (PPI) data indicated that headline producer prices had risen more than anticipated, while core PPI remained in line with expectations. Retail sales for August remained robust, indicating that consumers continued to be willing to spend.
In summary, the economic data for the week did not significantly alter the market’s expectations regarding the Federal Reserve’s decision to maintain interest rates at its September 19–20 policy meeting. Much of the data seemed to reinforce the growing anticipation of a scenario in which inflation gradually cools to the Fed’s target without triggering a severe recession. Notably, Wall Street’s widely watched “fear gauge,” the Chicago Board Options Exchange Volatility Index (VIX), reached its lowest point before the onset of the pandemic in early 2020.
U.S. Treasury yields experienced modest increases across various maturities. In the secondary market, prices remained relatively stable as investors shifted their focus to the primary market. The municipal bond market remained particularly quiet at the start of the week in anticipation of the CPI data, which ultimately had a limited impact on prices.
Issuance in the investment-grade corporate bond market exceeded expectations, with the new supply primarily consisting of shorter-maturity bonds. In the high-yield bond market, attention was mainly on the busy primary calendar, with sellers making room for new issuances. Similarly, participants in the bank loan market appeared to concentrate on newly issued loans.
Europe
Regarding local currency, the STOXX Europe 600 Index, representing pan-European stocks, concluded the session with a 1.60% gain. This increase followed the European Central Bank’s decision to raise interest rates, indicating that borrowing costs might have reached their zenith. Additionally, improved economic data from China seemed to buoy investor sentiment. The DAX in Germany registered a 0.94% increase, France’s CAC 40 Index saw a gain of 1.91%, and Italy’s FTSE MIB advanced by 2.35%. The UK’s FTSE 100 Index surged by 3.12%, partly driven by the depreciation of the UK pound against the U.S. dollar. A weaker UK currency benefits the index, which comprises numerous multinational firms with substantial overseas revenue streams.
Across Europe, government bond yields exhibited a general decline, fuelled by optimism that the ECB’s interest rate hikes might be nearing their conclusion. In the UK, bond yields weakened following a more substantial-than-anticipated drop in monthly gross domestic product (GDP) for July.
ECB Implements Rate Hike, Hints at Potential Peak The ECB executed its 10th consecutive interest rate hike and suggested that it might be approaching the conclusion of its campaign to tighten monetary policy. ECB President Christine Lagarde noted that a “solid majority” of policymakers supported the quarter-point rate hike, bringing the key deposit rate to a record high of 4.0%. The ECB’s move signalled that “interest rates have reached levels that, if sustained for a sufficient duration, will significantly contribute to the timely achievement of the inflation target.”
Eurozone Industrial Output Declines Significantly; EC Revises Growth Projection Data from the European Union’s statistical office revealed a more substantial-than-expected 1.1% sequential decline in industrial production in the eurozone for July. This drop was primarily attributed to sharp decreases in producing durable consumer and capital goods.
The European Commission (EC) revised its GDP growth forecast for the eurozone in 2023 from 1.1% to 0.8%. The forecast also projected a 0.4% contraction in the German economy, the largest in the eurozone, compared to the previous estimate of a 0.2% expansion.
UK Economy Experiences Sharp Slowdown: Rise in Unemployment, Accelerated Wage Growth The UK economy contracted faster than anticipated in July due to a combination of worker strikes, adverse weather conditions, and increasing borrowing costs, according to the Office for National Statistics. GDP declined by 0.5% sequentially, following a similar increase in June. However, the three-month rolling growth rate showed a 0.2% increase, supported by expansions in the services, production, and construction sectors.
Unexpectedly, the UK’s unemployment rate rose to 4.3% in the three months through July, up from 4.2% in the previous quarter. This surpassed the Bank of England’s third-quarter forecast of 4.1%. Nonetheless, total wage growth during the same period, year-over-year, accelerated to a higher-than-expected rate of 8.5%.
Japan
Japanese stock markets had a positive week, with the Nikkei 225 Index rising by 2.8% and the broader TOPIX Index gaining 2.9%. This upward momentum was fueled by encouraging Chinese economic data, which led investors to believe that China’s stimulus efforts effectively boosted its economy and global markets. The strength of U.S. stocks and the weakening yen, which benefited Japanese exporters, also contributed to the favourable investment environment.
Comments from Bank of Japan (BoJ) Governor Kazuo Ueda were briefly perceived as hawkish and temporarily boosted the yen. Ueda hinted that by the end of the year, the central bank could have enough data to assess whether wages would continue to rise, potentially paving the way for a reconsideration of the policy of negative interest rates. It’s worth noting that sustained wage growth is a crucial element in achieving the BoJ’s 2% inflation target. While Ueda emphasised that policy normalisation remains a distant prospect, some investors interpreted his remarks as a verbal intervention to address the yen’s historic weakness.
Although the yen initially strengthened in response to Ueda’s comments, it ended the week largely unchanged, hovering around the upper end of the JPY 147 range against the U.S. dollar. This is primarily due to the interest rate differential between Japan and the United States, which has kept the yen at its lowest levels in approximately three decades.
The speculation regarding potential monetary policy normalisation by the BoJ had a notable impact on Japanese government bonds (JGBs), causing them to decline. Consequently, the yield on the 10-year JGB rose to 0.70%, the highest level since 2013, up from 0.64% at the previous week’s close.
Prime Minister Fumio Kishida carried out a cabinet reshuffle, as expected, but retained his core economic policy team, which is responsible for introducing new stimulus measures in October. Following the reshuffle, Kishida pledged to continue providing gasoline subsidies to households, recognising that rising prices eroded purchasing power, especially in the absence of commensurate wage growth. He also affirmed his commitment to ensuring that wage growth consistently surpasses inflation rates by several percentage points and that Japan fully emerges from the deflationary cycle.
China
Chinese stocks displayed a mixed performance in response to official indicators suggesting a potential stabilisation of the country’s economy, though persistent weaknesses in the property market persisted. The Shanghai Composite Index ended the week with minimal changes, while the blue-chip CSI 300 Index experienced a decline of 0.83%. In Hong Kong, the benchmark Hang Seng Index edged down 0.1%, as reported by Reuters.
Official data for August provided notable evidence of economic steadiness. Industrial production and retail sales exceeded expectations, showing growth compared to the previous year. Additionally, unemployment rates unexpectedly declined in July. However, there was a notable shortfall in fixed asset investment growth due to a more substantial drop in real estate investment. New bank loans surged to an above-consensus RMB 1.36 trillion in August, up from July’s RMB 345.9 billion. Corporate demand was the primary driver of credit expansion, with rising household and longer-term loans.
Regarding inflation, consumer prices rebounded into positive territory after contracting in July. The consumer price index saw a 0.1% increase in August year-on-year, contrasting with a 0.3% decline in July. Meanwhile, as expected, the producer price index fell by 3% year-on-year but showed a slight improvement from the 4.4% drop in the previous month. These inflation figures added to the growing perception that China’s economic slowdown might be bottoming out, prompting Beijing to implement a series of stimulus measures in recent weeks to stimulate demand.
In monetary policy developments, the People’s Bank of China (PBOC) reduced its reserve ratio requirement by 25 basis points for most banks, marking the second such move this year to inject more liquidity into the financial system. The central bank also infused RMB 591 billion into the banking system, compared to RMB 400 billion in maturing loans. Many economists anticipate that the PBOC will continue its policy easing for the remainder of 2023 as the government strives to revive China’s post-pandemic economy, which has been losing momentum following a brief resurgence in the first quarter.
Market indices
| Local Currency | Sterling Pound | |||
| Index | Last week | YTD | Last week | YTD |
| UK | ||||
| FTSE 100 | 2.55% | 1.77% | 2.55% | 1.77% |
| US | ||||
| S&P 500 | -1.40% | 16.88% | 0.26% | 13.42% |
| Europe | ||||
| Euro stoxx 50 | 0.35% | 15.78% | 1.28% | 12.29% |
| Asia | ||||
| Nikkei 225 | 1.80% | 27.56% | 3.37% | 10.46% |
| Hang Seng | -3.20% | -2.70% | 1.67% | -5.88% |
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