United States
In the United States, major equity benchmarks experienced a decline over the past week in response to the Federal Reserve’s hawkish outlook and increasing U.S. Treasury yields. The S&P 500 Index suffered its most significant single-day loss in six months on Thursday, marking its third consecutive week of losses.
In addition to concerns about rising interest rates, worries regarding the United Auto Workers’ strike and the potential for a U.S. government shutdown may have added to the market’s downward pressure. Furthermore, some investors engaged in tax-loss harvesting as the fiscal year-end approached, potentially exacerbating the selling pressure.
Federal Reserve Surprises with Extended Rate Forecast As anticipated, the Federal Reserve maintained its short-term lending benchmark within a target range of 5.25% to 5.50%, the same level set at its previous meeting in July. The updated Summary of Economic Predictions still indicated one more rate hike in 2023. However, the central bank surprised the markets by projecting significantly higher rates for 2024 and raising its rate prediction for 2025. Additionally, the Federal Reserve increased its growth forecast, recognising the economy’s resilience exceeded expectations.
Aside from the Federal Reserve meeting, it was a relatively uneventful week regarding economic news. Weekly initial jobless claims came in lower than expected and reached their lowest level since January, reinforcing the perception of a robust labour market.
U.S. Treasury Yields Surge to Multiyear Highs Anticipations of the Federal Reserve maintaining higher short-term rates for an extended period, coupled with signals of robust economic growth, led to an increase in longer-term U.S. Treasury yields. The benchmark 10-year U.S. Treasury yield reached its highest point in 16 years. (Note that bond prices move inversely to yields.) Yields on AAA-rated municipal bonds also experienced a significant uptick alongside this trend.
Europe
The STOXX Europe 600 Index, representing pan-European stocks, concluded the session with a 1.98% decline as central banks signalled their commitment to maintaining high-interest rates. Concerns lingered due to elevated oil prices and discouraging business activity data, casting shadows on the economic outlook. Major national stock indices followed suit, with France’s CAC 40 dropping by 2.67%, Germany’s DAX losing 2.26%, and Italy’s FTSE MIB slipping by 1.13%. In contrast, the UK’s FTSE 100 saw little change in local currency terms, benefitting from the depreciation of the UK pound against the U.S. dollar. This depreciation bolstered the index, which includes numerous multinational corporations with significant overseas revenues.
Eurozone government bond yields increasedsignalled after European Central Bank (ECB) officials suggested the possibility of another interest rate hike, and the U.S. Federal Reserve signalled a prolonged period of higher rates. Nevertheless, this trend moderated later in the week, driven by a surprising decision from the Bank of England (BoE) to maintain short-term interest rates at their current level alongside underwhelming eurozone PMI data. In contrast, UK gilt yields decreased, with more pronounced shifts observed in shorter-maturity bonds.
BoE Holds Rates Steady; UK Inflation Slows Faster Than Expected The BoE’s Monetary Policy Committee voted 5-4 to keep the key interest rate at 5.25%, citing a slowdown in economic growth. This marked the first pause in rate hikes since December 2021. BoE Governor Andrew Bailey emphasised the possibility of future rate increases should evidence of persistent inflationary pressures emerge. This decision coincided with official data revealing that annual inflation in the UK decelerated to 6.7% in August from 6.8% in July. However, measures of underlying inflationary pressures remained well above the BoE’s 2% target.
SNB Surprises With Rate Hike Pause; Sweden’s Riksbank Tightens Policy The Swiss National Bank (SNB) defied expectations by keeping its key interest rate at 1.75%, a departure from its previous hikes since March 2022. The SNB left room for further increases if they are deemed necessary to maintain price stability over the medium term. As anticipated, Sweden’s Riksbank raised its policy rate by a quarter percentage point to 4.00%, with the possibility of another increase in November.
Eurozone PMI Declines for Fourth Month as New Orders Decrease Eurozone orders saw their most substantial decline in nearly three years, leading to a fourth consecutive month of contraction in private sector output, as reported by purchasing manager surveys compiled by S&P Global. The seasonally adjusted HCOB Flash Eurozone Composite PMI Output Index, which amalgamates manufacturing and services sector activities, stood at 47.1 in September, slightly up from 46.7 in August. (A reading below 50 indicates contraction.) Manufacturing continued to experience the most significant decline, while the services sector also registered a second consecutive month of reduced activity.
Japan
Japanese stock markets experienced a decline throughout the week, with the Nikkei Index falling by 3.4% and the broader TOPIX registering a 2.2% drop. Investor sentiment was affected by the U.S. Federal Reserve’s announcement of its intention to maintain higher interest rates for an extended period to combat persistent inflation. In contrast, the Bank of Japan (BoJ) met expectations by keeping its monetary policy unchanged, dashing hopes that the central bank might suggest an exit from its negative interest rate policy.
The yen faced depreciation due to the ongoing divergence in monetary policies between the hawkish Fed and the dovish BoJ. The yen weakened to approximately JPY 148.3 against the U.S. dollar, down from approximately JPY 147.8 the previous week. Speculation about potential intervention in foreign exchange markets to support the yen persisted, prompting Finance Minister Shunichi Suzuki to affirm that the government would address excessive currency volatility while considering all available options. He noted that last year’s operations involving the purchase of yen and the sale of the U.S. dollar had been effective to a certain extent.
As widely expected, the BoJ maintained its short-term interest rate at -0.1% at its September meeting and kept 10-year Japanese government bond (JGB) yields at around zero per cent. The central bank also left unchanged the 50-basis-point allowance band set on either side of the zero per cent yield target, along with the 1% cap effectively adopted in July when it adjusted its yield curve control (YCC) policy to allow yields to increase more freely. The yield on the 10-year JGB rose during the week to 0.74% from 0.70%.
The BoJ reiterated its commitment to provide additional stimulus if necessary. The central bank continues its monetary easing under the current framework because it has not yet observed sustainable and stable inflation accompanied by wage growth. Governor Kazuo Ueda stated that once the central bank can achieve this goal, it will consider abandoning its YCC policy and adjusting the negative interest rate.
Although Japan’s core consumer price index (CPI) for August showed a year-on-year increase of 3.1%, slightly exceeding consensus expectations, core inflation has been gradually slowing down. This decline is primarily attributed to government economic measures that have suppressed energy prices. The BoJ anticipates further deceleration in the year-on-year CPI rate, followed by a moderate acceleration as the output gap improves, along with medium- to long-term inflation expectations and wage growth.
China
Chinese stocks experienced an upswing as investor confidence in the country’s economic prospects grew. The Shanghai Composite Index recorded a 0.47% increase, while the blue-chip CSI 300 Index saw a gain of 0.81%. In contrast, Hong Kong’s benchmark Hang Seng Index registered a 0.7% decline, as reported by FactSet.
China did not release any significant economic indicators during the week. However, official data from the previous week indicated signs of economic stabilization in the country. Industrial production, retail sales, and lending activity all exceeded expectations for the past month compared to the same period the previous year. Nevertheless, fixed-asset investment fell short of expectations, primarily due to a worsening decline in property investment.
On Thursday, China’s cabinet, the State Council, affirmed its commitment to expedite measures aimed at solidifying the nation’s recovery and sustaining growth into 2024, according to state media reports. Senior officials acknowledged that China faces economic challenges but pointed to historical trends suggesting long-term economic improvement. In response to concerns about China’s economic health, the country experienced capital outflows of USD 49 billion in August, the largest since December 2015. This outflow pushed the yuan to a 16-year low against the U.S. dollar, as reported by Bloomberg. In light of these signals of deteriorating growth, Beijing implemented a series of pro-growth measures in recent weeks, targeting increased consumption and the revival of the sluggish property market.
In monetary policy developments, Chinese banks maintained their one- and five-year loan prime rates at their current levels. This decision came after the People’s Bank of China (PBOC) held its medium-term lending facility rate steady the previous week, coupled with a reduction in the reserve requirement ratio for banks, marking the second such reduction this year. Zou Lan, the head of monetary policy at the PBOC, indicated that the central bank possesses ample policy flexibility to support China’s economic recovery, raising expectations of potential further easing measures following this month’s pause.
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