Weekly Market Recap

House prices in the UK reached a two-year high in August and the recent interest rate cut has increased confidence among homebuyers, the UK's largest mortgage lender has said. Halifax said prices last month were up 4.3% compared to last year and buyers have been boosted after the Bank of England reduced interest rates at the beginning of August, in the first cut for four years.

The week’s heavy economic calendar generally surprised on the downside, raising fears that the Federal Reserve (Fed) had waited too long to ease monetary policy. On Tuesday, the Institute for Supply Management reported that its purchasing managers’ index (PMI) of US manufacturing activity remained firmly in contraction territory in August, with new orders falling for the third consecutive month.

Wednesday’s tally of July job openings from the Labor Department arguably came as an even larger disappointment, with the number of unfilled positions falling to its lowest level (7.67 million) since January 2021. The number of people leaving their jobs voluntarily – often considered a better gauge of the strength of the labour market – ticked higher but off a downwardly revised number in June, which was the lowest since September 2020. On Thursday, payroll processing firm ADP reported its count of private payrolls had increased only 99,000 in August, well below forecasts and the lowest since January 2021.

Friday’s official payrolls report from the Labor Department painted a more complicated picture of the health of the labour market. Overall, employers added 142,000 jobs in August, below consensus estimates of around 160,000, while July’s gain was revised down to 89,000, marking the lowest level since December 2020. The household survey revealed that the unemployment rate had ticked lower, however, from 4.3% to 4.2%. Average hourly earnings also rose 0.4%, better than expected.

While investors continued to expect a rate cut at the Fed’s upcoming policy meeting in September, Friday’s jobs data appeared to sharply reduce expectations that the Fed would cut rates by a full 50 basis points (bp), as indicated by the CME FedWatch Tool. Paradoxically, perhaps, the yield on the benchmark 10-year US Treasury note appeared to fall back in response to the jobs report, hitting its lowest level since May 2023.

European Central Bank (ECB) Governing Council member Gediminas Simkus told Econostream Media that he saw a “clear case” for an interest rate cut in September but regarded the potential for another one in October was “quite unlikely.” In his view, it was appropriate to ease policy, given a clearly disinflationary trend and structurally “sluggish” growth, but “by how much and in exactly which month – time will tell.” His colleague, Martins Kazaks, told Latvian TV that policymakers could take the next step to decrease rates in September while adding that policy should only ease gradually.

Executive Board member Piero Cipollone told France’s Le Monde newspaper that recent economic data so far had confirmed that inflation was slowing, giving scope for the ECB to lower borrowing costs. “There is a real risk that our stance could become too restrictive and harm the economy,” he said. However, Bundesbank’s Joachim Nagel continued to warn about premature easing, given elevated wage growth and services inflation, in an interview with the Faz newspaper.

German manufacturing orders in July unexpectedly increased 2.9% sequentially after seasonal and calendar adjustments, following an upward revision of June’s result to 4.6%. However, when large orders for transportation equipment were stripped out, factory orders dropped -0.4%.

However, industrial production in Germany fell much more than expected, by -2.4% sequentially, having risen 1.7% in the prior month. Weakness in the automotive industry was a big part of this drop. The ifo Institute and the IfW Kiel Institute each lowered growth forecasts for the economy. Kiel said a contraction of -0.1% is likely this year, while ifo predicted the economy will stagnate.

China’s official manufacturing PMI slipped to a lower-than-expected 49.1 in August from 49.4 in July as production and new order declines deepened, the National Bureau of Statistics reported. The gauge has hovered below the 50-mark threshold, separating growth from contraction for all but three months since April 2023, according to Bloomberg. The nonmanufacturing PMI, which measures construction and services activity, edged up to an above-consensus 50.3 in August from July’s 50.2.

Separately, the private Caixin/S&P Global survey of manufacturing activity, which polls smaller, export-oriented firms, expanded to a better-than-expected 50.4 from July’s 49.8 as new orders returned to growth. The Caixin services PMI fell to 51.6 from July’s 52.1 reading, missing economists’ forecasts, as softer new work inflows and higher input costs contributed to lower staffing levels. The mixed PMI readings highlighted the uneven performance of China’s economy as a housing market slump – now in its fourth year – and rising trade tensions have weighed on the growth outlook.

The value of new home sales by the country’s top 100 developers fell -26.8% in August year on year, accelerating from a -19.7% drop in July, according to the China Real Estate Information Corp. The continued slide in new home prices signalled the waning impact of the government’s real estate rescue package in May and raised speculation of further support measures from Beijing to put a floor beneath the property downturn.

As weak US economic data raised some concerns that the world’s largest economy could be headed for a recession, investors sought assets perceived as safer, driving demand for Japanese government bonds (JGBs). With prices moving inversely to yields, the 10-year JGB yield fell to 0.85% from 0.89% at the end of the prior week. This was despite data showing that Japan’s real (inflation-adjusted) wages grew 0.4% year on year in July, boosted by pay hikes and summer bonuses. The reading marked the second consecutive monthly gain and was seen as bolstering the case for the Bank of Japan (BoJ) to hike rates further this year. Conversely, household spending rose only 0.1% year on year in July, remaining sluggish despite solid income growth.

Japan’s central bank targets 2% inflation in a sustainable manner, accompanied by wage growth, and its policymakers have repeatedly said that monetary policy settings would be adjusted if the outlook for the economy and prices were realised. BoJ Board Member Hajime Takata reaffirmed this stance during the week but also noted that, as differences in monetary policy stances may cause fluctuations in financial markets, it is necessary to monitor domestic and international developments for the time being and to carefully scrutinise at every policy meeting the impact of market moves on the economy and prices.

National housing prices increased by 0.5% month over month (MoM) in August, accelerating from the 0.3% increase in July. Annual growth remained solid at 7.1%. The rental market looks to be softening from a very tight level as both listings and vacancy rate rose for the past three months. Building approvals rose 10.4% MoM in July, reversing June’s decline.

Australia second-quarter GDP came in at 0.2% quarter over quarter (QoQ), in line with consensus. This marks the sixth consecutive quarterly decline in per capita GDP (-0.4% QoQ). Broad-based private sector weakness (-0.6% QoQ) was partially offset by strong government spending (0.8% QoQ). Hours worked grew strongly in the quarter, reflecting a sharp deterioration in labour productivity. This release is unlikely to shift the Reserve Bank of Australia’s expectations on the economy.

Last week, the MSCI All Country World Index (MSCI ACWI) lost -3.7% (12.0% YTD).

In the US, the S&P 500 Index fell -4.2% (14.5% YTD), suffering its worst weekly drop in 18 months, as worries over an economic slowdown appeared to weigh on sentiment. Information technology shares led the declines, driven in part by a drop in NVIDIA following rumours that it may be the subject of a Justice 
Department antitrust investigation, leading to a roughly USD 300 billion drop in the chip giant’s market capitalisation. Energy shares were also especially weak on the back of a decline in oil prices. Conversely, the typically defensive utilities, consumer staples and real estate sectors held up better. Growth shares lagged value stocks and large caps did better than small caps. The Russell 1000 Growth Index returned –5.4% (14.6% YTD), the Russell 1000 Value Index -3.1% (11.6% YTD) and the Russell 2000 Index -5.7% (4.1% YTD). The technology-heavy Nasdaq Composite lost -5.8% (11.8% YTD).

Some speculated that a factor in the declines may have been investor nervousness over seasonal trading patterns. Historically, September has been one of the worst months for stocks, averaging a -0.7% loss since 1950, while the S&P 500 has declined -4.9%, -9.3%, -4.8% and -3.9% over the last four years. Trading volumes also picked up as investors returned to the office following the summer holiday season. Markets were closed Monday in observation of the Labour Day holiday.

In Europe, the MSCI Europe ex UK Index ended the week -3.9% lower (7.0% YTD) on renewed fears about a deterioration in the outlook for global economic growth. Major stock indexes fell as well. Germany’s DAX Index dropped -3.2% (9.3% YTD), France’s CAC 40 Index lost -3.7% (0.2% YTD) and Italy’s FTSE MIB Index declined -3.1% (14.2% YTD). Switzerland’s SMI Index fell -4.2% (10.2% YTD). The euro appreciated versus the US dollar, ending the week at USD 1.11 for EUR, up from 1.10.The FTSE 100 Index slid -2.3% (9.0% YTD) and the FTSE 250 Index decreased -2.8% (6.6% YTD). The British pound was little changes versus the US dollar, ending the week at USD 1.31 for GBP.

Japan’s stock markets fell over the week. The TOPIX Index lost -4.2% (11.1% YTD) and the TOPIX Small Index retreated -3.0% (7.5% YTD). The markets slumped midweek, with semiconductor stocks tracking a US-led sell-off, and yen strength posing a headwind for Japan’s export-oriented companies. The yen appreciated to JPY 142.3 against the USD from JPY 146.2 at the end of the previous week, on expectations of narrowing Japan-US interest rate differentials. Market participants anticipate that the BoJ will raise interest rates further this year, while the US Fed looks set to cut rates in September.

In Australia, the S&P ASX 200 Index eased -0.5% (9.4 YTD) on the back of disappointing US manufacturing PMI and weak Australia second-quarter GDP growth. Australian government bond yields abated as investors again entered the risk-off mode. The Australian dollar weakened against the US dollar by 0.5%.

MSCI Emerging Markets Index was -2.2% lower (7.4% YTD), with a negative contribution to performance from the stock markets of China, India, Taiwan, South Korea and Brazil. 

Chinese equities retreated as investors digested weak corporate earnings and economic data. The Shanghai Composite Index gave up -2.7% (-4.6% YTD) and the blue-chip CSI 300 Index decreased -2.7% (-3.3% YTD). In Hong Kong, the benchmark Hang Seng Index fell -2.7% (6.3% YTD).

In Poland, the central bank concluded its scheduled two-day monetary policy meeting on Wednesday and – as was widely expected – decided to keep its key interest rate, the reference rate, at 5.75%. Other interest rates controlled by the central bank were also left unchanged.

According to the post-meeting statement, policymakers noted that economic conditions near the Polish economy (e.g. the eurozone) “are still weakened” and that Poland’s “gradual economic recovery continues.” Second-quarter gross domestic product was measured at a year-over-year rate of 3.2%, driven by “an increase in consumption demand,” while unemployment remained low and wage growth was “still running on the high level.”

As for inflation, central bank officials cited a 4.3% annual consumer price index inflation rate in August versus 4.2% in July and 2.6% in June. They attributed the recent increase in inflation to “increases in administered prices of energy carriers” and, to a lesser degree, “an increase in annual growth in prices of food and nonalcoholic beverages.” However, they deemed core inflation (“net of food and energy prices”) to be “relatively stable in recent months” and considered the year-over-year fall in producer prices to be “significant.”

Policymakers concluded that “despite the observed economic recovery, demand and cost pressures in the Polish economy remain relatively low.” However, they noted that “price pressure in the domestic economy is stimulated by a marked wage growth” and that “the rise in prices of energy carriers increases inflation significantly.” Because they believe this will “continue to affect the annual inflation rate in the coming quarters,” policymakers decided to leave interest rates at current levels.

In Chile, earlier in the week, the central bank of Chile – a major global producer of copper and lithium – reduced its monetary policy interest rate by -25bp, from 5.75% to 5.50%. The decision, which was unanimous among policymakers, was generally expected.

According to T. Rowe Price emerging markets sovereign analyst Aaron Gifford, the tone of the post-meeting statement was dovish – which was confirmed by the subsequent publication of the central bank’s Quarterly Monetary Policy Report, in which central bank officials slightly accelerated their expected downward path of its key interest rate.

Despite inflation that has recently moved above the 2% to 4% target range due to electricity price increases, policymakers believe – though Gifford is sceptical – that this supply shock will be a one-off event, with no second-round effects. On the other hand, they do see some softening in consumer demand and non-mining investment that could bring inflation back down to neutral sooner than previously expected.

Last week, the Bloomberg Global Aggregate Index (hedged to USD) returned 0.9% (4.1% YTD), the Bloomberg Global High Yield Index (hedged to USD) 0.2% (7.8% YTD) and the Bloomberg Emerging Markets Hard Currency Aggregate Index 0.5% (6.7% YTD).

Over the week, the 10-year Treasury yield decreased -19bp to 3.71% from 3.90% (down -17bp YTD). The 2-year Treasury yield declined -27bp, ending the week at 3.65% from 3.92% (down -60bp YTD). 

Tuesday was a record-breaking day in the US investment-grade corporate bond market. It was the highest number of issuers (27) ever seen in one day, while it was the third-busiest day by total volume (USD 43 billion across 52 tranches). Nevertheless, issues were, on average, oversubscribed. Similarly, the high yield market saw a heavy slate of new issues, while volumes picked up following a slow start to the week.

Over the week, the 10-year German bund yield declined -13bp, ending at 2.17% from 2.30% (up 15bp YTD).

The 10-year UK gilt yield decreased -12bp, ending the week at 3.89% from 4.01% (up 36bp YTD).