Weekly Market Recap

UK private sector activity remained in expansionary territory for the 11th month running. The Flash UK PMI Composite Output Index registered 52.9, down from 53.8 in August. Inflation, as measured by prices charged, eased across the economy to a 42-month low.

Stocks pulled back somewhat early Tuesday on news that the Conference Board’s index of US consumer confidence fell sharply in August, putting it back near the bottom (98.7) of its range over the past two years, according to its chief economist. The index of consumers’ perception of labour market conditions fell to 81.7, not far from the threshold of 80 that has historically predicted a recession.

The week brought some mixed news about the housing sector, following some recent signals that it might be stabilising as mortgage rates begin to come down. The Commerce Department reported on Wednesday that new home sales declined – if not as much as expected – -4.7% in August while building permits data were revised lower. Even as new buyers remained on the sidelines, however, the drop in mortgage rates did seem to be sparking a surge in refinancing. The Mortgage Bankers’ Association Mortgage Refinance Index jumped to its highest level since April 2022, which was shortly after the Federal Reserve (Fed) started to raise short-term rates.

Some benign inflation data helped spur an early rally Friday. Before trading opened, the Commerce Department reported that the Fed’s preferred inflation gauge, the core (less food and energy) personal consumer expenditures (PCE) price index, rose only 0.1% in August, a tick below expectations. On a year-over-year basis, the index climbed only 2.2%, close to the Fed’s 2.0% long-term inflation target and the least since February 2021. Meanwhile, personal incomes and spending both surprised on the downside in August, further suggesting a moderation in inflationary pressures.

Business activity in the eurozone unexpectedly shrank in September due to a marked fall in new orders, according to purchasing managers’ indexes (PMIs) compiled by S&P Global. An initial reading of the seasonally adjusted HCOB Eurozone Composite PMI Output Index fell to 48.9 from 51.0 in August (a PMI reading less than 50 indicates a contraction). Services activity came close to stalling as the boost from the Paris Olympics faded, while manufacturing contracted at a faster pace. German business activity declined the most in seven months, signalling that the economy is likely on track for a second quarterly drop in output.

Business morale worsened in Germany in September, while consumer confidence stabilised at a low level, adding to signs that the economy could have tipped into recession. The ifo Institute said its business climate index dropped to 85.4 in September from 86.6 in August. Sentiment fell in all sectors of the economy, except construction. Separately, the consumer sentiment index published by GfK and the Nuremberg Institute for Marketing Decisions ticked up to -21.2 going into October versus -21.9 the month before.

Sweden’s Riksbank cut its policy rate by -25 basis points (bp) to 3.25% and indicated that, if the outlooks for inflation and economic activity remain unchanged, further reductions could be in store for the two remaining Executive Board meetings this year. The Swiss National Bank also lowered borrowing costs by -25bp to 1.00%, as expected. Governor Thomas Jordan signalled that the bank was ready to cut interest rates again as inflation pressures had decreased markedly.

The People’s Bank of China (PBOC) cut its reserve requirement ratio by -50bp for most banks, its second cut in banks’ required reserves this year, and reduced its seven-day reverse repo rate – a key short-term policy rate – by -20bp to 1.5%. It cut the medium-term lending facility rate by -30bp to 2%, marking the largest-ever cut to the monetary policy tool since the central bank began using it to guide market rates in 2016, according to Bloomberg. The moves were part of a sweeping stimulus package announced last Tuesday at a rare press conference by PBOC Governor Pan Gongsheng that aims to jumpstart China’s ailing economy. Other measures unveiled by the PBOC included a rate cut for existing home mortgages and slashing the nationwide down payment ratio for second home purchases to 15% from 25%.

On Thursday, China’s top leaders vowed to take action to stabilise the country’s property market and make real estate prices “stop declining,” according to state media. The readout from the 24-man Politburo included a statement that China would deploy the necessary fiscal spending to meet its 2024 growth target of around 5%. The Politburo statement contained no specifics on fiscal spending. However, China plans to issue special sovereign bonds worth about RMB 2 trillion (USD 284.4 billion) this year as part of the fiscal stimulus plan, Reuters reported, citing unnamed sources. The package will include RMB 1 trillion of special sovereign debt focused on boosting domestic consumption, which has flagged since pandemic lockdowns ended.

Taken together, the stimulus package is a positive development for China’s economy and will bolster near-term activity and pull market sentiment from very weak levels, believes Chris Kushlis, T. Rowe Price’s chief emerging markets strategist. Longer term, however, the stimulus is not large enough to sustainably free China from its weaker growth trajectory, Kushlis believes.

After Japan’s markets closed on Friday, Shigeru Ishiba won the Liberal Democratic Party’s leadership contest – he will therefore be Japan’s next prime minister. Ishiba, a former defence minister, defeated Economic Security Minister Sanae Takaichi in a closely contested runoff vote. Ishiba’s monetary policy views are considered slightly hawkish, and the market’s perception is that he is unlikely to resist efforts by the Bank of Japan (BoJ) to normalise monetary policy. His government will continue to take action to eliminate deflation.

In the latest comments following the decision to hold interest rates steady at its 19-20 September meeting, BoJ Governor Kazuo Ueda said that the central bank had enough time to assess market and economic developments before adjusting monetary policy again – suggesting that it was in no rush to raise rates further. Nevertheless, the yield on the 10-year Japanese government bond rose to 0.85% from 0.84% at the end of the previous week.

On the economic data front, the Tokyo-area core consumer price index (CPI), considered a leading indicator of nationwide trends, rose 2.0% year on year in September, down from 2.4% in August. The slowdown in consumer inflation was expected and largely attributable to the effect of renewed energy subsidies. Separately, flash PMI data collated by au Jibun Bank showed that Japan’s private sector continued to expand in September, although the rate of growth slowed slightly from August. Business activity in the services segment drove the expansion, while manufacturing output contracted marginally.

Last week, the MSCI All Country World Index (MSCI ACWI) rose 1.9% (19.2% YTD).

In the US, the S&P 500 Index posted a gain of 0.6% (21.6% YTD) and moved to record highs, as investors appeared to celebrate new stimulus measures in China. Chemicals and materials stocks were solid on hopes for a rebound in Chinese demand. Copper prices also increased, raising hopes that “Doctor Copper” was again reflecting a healthier global industrial economy. Technology stocks outperformed as well, thanks to reports of a possible takeover of Intel and news that NVIDIA’s CEO had ceased sales of his shares in the company. In addition, chipmaker Micron Technology surged and seemed to provide a general tailwind for the sector following its upbeat outlook for artificial intelligence demand.

Growth stocks underperformed value shares and small caps lagged large caps. The Russell 1000 Growth Index returned 0.4% (23.9% YTD), the Russell 1000 Value Index 0.9% (16.3% YTD) and the Russell 2000 Index -0.1% (10.8% YTD). The technology-heavy Nasdaq Composite added 1.0% (21.4% YTD).

In Europe, the MSCI Europe ex UK Index rebounded, ending the week 3.1% higher (12.0% YTD) as evidence of slowing business activity spurred hopes for interest rate cuts. China also unveiled a package of measures to stimulate its economy, helping to lift sentiment. Major stock indexes also rose. Major stock indexes advanced. Germany’s DAX Index rallied 4.0% (16.2% YTD), France’s CAC 40 Index jumped 4.0% (6.3% YTD) and Italy’s FTSE MIB Index climbed 3.0% (19.3% YTD). Switzerland’s SMI Index rose 2.5% (13.4% YTD). The euro was stable versus the US dollar, ending the week at USD 1.12 for EUR.

The FTSE 100 Index was up 1.2% (10.9% YTD) and the FTSE 250 Index gained 2.0% (10.7% YTD). The British pound appreciated versus the US dollar, ending the week at USD 1.34 for GBP, up from 1.33.

Japan’s stock markets gained over the week. The TOPIX Index surged 4.6% (18.2% YTD) and the TOPIX Small Index rallied 2.9% (12.7% YTD).The latest commentary from the BoJ, perceived as dovish, weighed on the yen, providing a favourable backdrop. Nevertheless, the Japanese currency appreciated to JPY 142.2 against the US dollar, from 143.9 at the end of the previous week. Optimism also came from China’s stimulus announcements detailing various support mechanisms in response to the country’s sluggish economic growth and weak housing market. Given the share of Japanese exports going to China and Japan’s sensitivity to Chinese PMI and other economic data, the stimulus announcements boosted the many Japanese companies that are direct or indirect China beneficiaries.

In Australia, the S&P ASX 200 Index ended the week flat (12.7% YTD).

MSCI Emerging Markets Index was 6.2% higher (17.5% YTD), with a positive contribution to performance from the stock markets of China, India, Taiwan, South Korea and Brazil. 

Chinese stocks surged after Beijing unveiled a slew of measures to shore up the economy. The Shanghai Composite Index rallied 12.8% (6.7% YTD) and the blue-chip CSI 300 Index soared 15.7% (10.9% YTD). The rally marked the biggest weekly gain for the benchmark CSI 300 since 2008 when Beijing unveiled a massive stimulus package during the global financial crisis. In Hong Kong, the benchmark Hang Seng Index jumped 13.0% (26.1% YTD). 

In Hungary, the National Bank of Hungary (NBH) held its regularly scheduled meeting and reduced its main policy rate, the base rate, from 6.75% to 6.50%. The NBH also lowered the overnight collateralised lending rate – the upper limit of an interest rate “corridor” for the base rate – from 7.75% to 7.50%. In addition, the central bank cut the overnight deposit rate, which is the lower limit of that corridor, from 5.75% to 5.50%.

According to the central bank’s post-meeting statement, policymakers acknowledged again that the country’s economic recovery “stalled” in the second quarter: Compared with the first quarter, “domestic economic performance” fell by -0.2%, while GDP rose by 1.5% in annual terms. While real wage growth remained “strong,” tightness in the labour market “has eased” in the last few quarters. They believe that “gradually rising household consumption” will be the economy’s main growth driver this year.

Regarding inflation, central bank officials noted that inflation in August “eased back to the tolerance band again, with consumer prices rising by 3.4% in annual terms.” They also noted that household inflation expectations are “on a downward trend but display more volatility than usual.” While they anticipate that consumer prices will rise “slightly above” 4% by the end of the year, they also expect the “disinflationary trend” to continue, starting in the first quarter of 2025.

In light of these factors, plus several others – such as a “looser” external monetary policy environment, a “subdued” outlook for external economic activity, and “stable” financial market developments – policymakers decided to implement “a careful reduction in interest rates.” Given the risks and volatility of the current environment, they expect to continue using “a careful and patient approach to monetary policy.” While they consider monetary policy to remain “restrictive,” they deem it helpful in fostering financial market stability and sustainably achieving their inflation target through positive real (inflation-adjusted) interest rates.

In the Czech Republic, the Czech National Bank held its scheduled monetary policy meeting and as was widely expected, reduced its main policy rate, the two-week repo rate, by -25bp, from 4.50% to 4.25%. The decision was not unanimous, however, as one of the seven bank Board members voted for a reduction of -50bp.

According to the central bank’s post-meeting statement, central bank officials consider the economy to be growing “below its potential.” While wage growth remains “elevated from a historical perspective,” policymakers do not believe that a wage-price spiral is about to materialise. They acknowledge that “real household income growth is recovering” but is being “counteracted by negative sentiment.” They concluded that the recovery in domestic demand is “slow,” which is “confirmed by” retail and services sales data.

As for inflation, policymakers noted that “price stability…persists in the Czech Republic” because inflation has been close to their 2% target since the beginning of 2024. Nevertheless, they declared that the “fight against inflation is not over” because they still see some inflationary pressures in the economy and the risk of those pressures strengthening. As a result, they consider it “necessary to persist with tight monetary policy and carefully consider any further rate cuts.”

Last week, the Bloomberg Global Aggregate Index (hedged to USD) returned 0.1% (4.5% YTD), the Bloomberg Global High Yield Index (hedged to USD) 0.2% (9.5% YTD) and the Bloomberg Emerging Markets Hard Currency Aggregate Index 0.2% (8.1% YTD).

Over the week, the US 10-year Treasury yield was little changed, increasing 1bp to 3.75% from 3.74% (down -13bp YTD). The 2-year Treasury yield decreased -3bp, ending the week at 3.56% from 3.59% (down -69bp YTD).

Meanwhile, issuance was heavy in the US short-maturity investment-grade (IG) corporate bond market. Roughly half of the week’s IG issues were oversubscribed. The firmer macro backdrop – partly driven by China stimulus headlines – was broadly supportive of sentiment in the high yield bond market. The high yield market traded mostly flat, however, amid average volumes. Investors seemed to largely focus on issuance as a flurry of new deals was announced.

Over the week, the 10-year German bund yield declined -8bp, ending at 2.13% from 2.21% (up 11bp YTD).

The 10-year UK gilt yield increased 8bp, ending the week at 3.98% from 3.90% (up 45bp YTD).