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Our Multi-Asset Solutions team produce a weekly market recap which aims to summarise the previous week’s major events and developments that may impact markets. They try to include points that may aid you in your decision making or conversations with clients. This is supplemented by a market data sheet, offering a summary of financial market performance. Last week’s summary is below.
Economic and political backdrop
The US
In August, the core personal consumption expenditures (PCE) index, which the Federal Reserve (Fed) watches closely and excludes the volatile food and energy categories, increased 3.9% from year-ago levels – the lowest annual inflation rate in about two years but above the central bank’s 2% target. This latest reading represents a moderation from the upwardly revised 4.3% annual inflation rate logged in July. On a month-over-month basis, core PCE inflation came in at 0.1%, which was below expectations. Including all items, monthly inflation quickened to 0.4% from 0.2% in July, mainly driven by higher energy prices.
Although recent manufacturing surveys have signalled weakness in new orders, durable goods orders and shipments increased month over month in August. Headline orders increased 0.2%, paced by strength in machinery. Consensus expectations had called for a decline. Excluding transportation, durable goods orders increased 0.4% from July. This metric, considered a near-term indicator of the economy’s health, omits the transportation category because the big price tags on aircraft and other equipment create the potential for large orders that can distort underlying trends.
The Conference Board’s gauge of US consumer confidence dipped to 103.0 in September, a reading that was below expectations and down from the preceding month’s upwardly revised reading of 108.7. Much of this weakness stemmed from the survey’s expectations component, which declined 9.6 points to 73.7, as the percentage of respondents who thought a recession was “somewhat” or “very likely” ticked up after declining in August.
Europe
A handful of European Central Bank (ECB) officials – including ECB President Christine Lagarde and Chief Economist Philip Lane – reaffirmed their commitment to maintaining a restrictive monetary policy for an extended period in an effort to bring inflation back to the 2% target. Meanwhile, ECB Executive Board member Frank Elderson said in an interview with Market News International that rates had not necessarily peaked and that future monetary policy decisions would depend on incoming data. Austrian central bank Governor Robert Holzmann went a step further, suggesting in an interview with Bloomberg that persistent inflationary pressures may yet lead to further rate hikes.
Consumer prices increased 4.3% annually in September – weaker than forecast and the slowest pace in about two years. This inflation rate was a marked improvement from the 5.2% registered in August. The initial estimate of inflation data also showed that the core rate (a measure of underlying inflation pressures that excludes food, energy, alcohol and tobacco) declined to 4.5% from 5.3%.
The UK
The UK economy grew faster than expected in the first three months of the year, according to revised figures for GDP. The Office of National Statistics pegged first-quarter growth at 0.3%, as opposed to its previous estimate of 0.1%. Its estimate of second-quarter GDP growth was unchanged.
Meanwhile, the property market continued to slow. Bank of England data showed banks and building societies approved 45,354 mortgages for house purchases in August, down from 49,532 in July.
Japan
Prime Minister Fumio Kishida outlined a new economic stimulus plan, the details of which are to be decided in October and which will be funded by a supplementary budget. The plan is aimed at bringing about a virtuous cycle of capital investment, wage growth and investment in people. One focal point is supporting long-term investment in growth fields such as semiconductors, batteries and biotechnology. Also under consideration is the extension into next year of what had been a temporary subsidy to mitigate soaring energy prices.
China
No official economic indicators in China were released during the week. However, a private survey showed that prices in China are recovering, assuaging fears of a prolonged deflation. World Economics reported that its all-sector price index for China rose to a 14-month high in September. “This suggests fears of Chinese price deflation ushering in a Japanese-style period of very low or negative growth have been overblown,” said the London-based data company, which created the widely used Purchasing Managers’ Indexes (PMIs) now owned by S&P Global. “The signs of a resumption of growth in [China] over recent decades are looking a little more positive.”
The World Economics survey was the latest data point indicating that China’s economy may have bottomed after losing momentum following a brief post-lockdown recovery in the first quarter. Official data for August released earlier in September also pointed to signs of stabilisation in the Chinese economy. Industrial production and retail sales grew more than forecast year on year (YoY), while unemployment unexpectedly fell from July. But fixed-asset investment growth missed expectations due to a steeper decline in property investment.
Australia
Australia headline inflation increased 5.2% YoY in August, boosted by stronger fuel prices and a monthly acceleration in food prices. Yet, core inflation remained flat at 5.6% YoY. Higher fuel prices and still resilient labour demand posed upside risks to the inflation forecast of the Reserve Bank of Australia (RBA).
Australian nominal retail sales eased to 0.2% month over month in August from 0.5% in the previous month. Since spending was supported by warmer weather, additional promotional activity linked to Afterpay Day and the FIFA Women's World Cup, nominal retail sales growth could continue to weaken in the coming months.
Markets
Last week, the MSCI All Country World Index (MSCI ACWI) retreated -0.9% (-4.1% in September, -3.3% in the third quarter, 10.5% YTD).
In the US, the S&P 500 Index closed with a loss of -0.7% (-4.8% in September, 13.1% YTD), suffering a fourth consecutive weekly pullback, as upward pressure on rates appeared to weigh on investor sentiment. Within the index, utilities lost the most ground. Energy stocks, on the other hand, outperformed.
Growth stocks fared better than value stocks, while small-cap shares, which have lagged large-caps meaningfully this year, eked out gains and outperformed large-caps. The Russell 1000 Growth Index returned -0.3% (-5.4% in September, 25.0% YTD), the Russell 1000 Value Index -0.9% (-3.9% in September, 1.8% YTD) and the Russell 2000 Index 0.6% (-5.9% in September, 2.5% YTD). Over the week, the technology-heavy Nasdaq Composite was broadly flat, returning 0.1% (-5.8% in September, 27.1% YTD).
In Europe, the MSCI Europe ex UK Index decreased -0.7% (-2.5% in September, 9.2% YTD) amid concerns about a prolonged period of higher interest rates and a weak Chinese economy. Major country stock indexes retreated. Germany’s DAX Index slid -1.1% (-3.5% in September, 10.5% YTD), France’s CAC 40 Index slipped -0.7% (-2.4% in September, 13.4% YTD) and Italy’s FTSE MIB Index dropped -1.2% (-1.9% in September, 24.0% YTD). Switzerland’s SMI Index moved down -0.4% (-1.3% in September, 5.4% YTD). The euro weakened versus the US dollar, ending the week at USD 1.06 for EUR, down from 1.07.
In the UK, the FTSE 100 Index ticked lower -0.9% (2.4% in September, 5.2% YTD) and the FTSE 250 Index was down -1.7% (-1.5% in September, -0.5% YTD). The British pound was little changed versus the US dollar, ending the week at USD 1.22 for GBP, a six-month low. The pound depreciated by -3.7% against the US dollar in September, its worst month since last year’s mini budget of Liz Truss.
Japan’s stock markets fell. The Nikkei 225 Index declined -1.1% (-1.7% in September, 24.3% YTD), the broader TOPIX Index decreased -1.5% (0.4% in September, 25.6% YTD) and the TOPIX Small Index lost -0.6% (0.1% in September, 20.9% YTD). Concerns about US interest rates potentially remaining higher for longer and the soaring price of oil weighed on sentiment. However, investors welcomed the Japanese government’s announcement of a new economic stimulus plan. Meanwhile, slowing core inflation in the Tokyo area lent support to staunch commitment of the Bank of Japan (BoJ) to its ultra-accommodative monetary policy stance in pursuit of its inflation target.
The yen weakened to JPY 149.4 against the US dollar, from JPY 148.4 the previous week, hitting an 11-month low. This added to speculation that Japanese authorities could intervene in the foreign exchange market to prop up the yen, having repeatedly stated that they would respond appropriately to rapid currency moves. However, Finance Minister Shunichi Suzuki denied that the authorities have in mind a specific level for the US dollar-Japanese yen exchange rate that would trigger an intervention.
In Australia, the S&P ASX 200 Index slid -0.3% (-2.6% in September, 5.0% YTD) as the concern for a November hike due to higher inflation was partially offset by the dovish tone from the preview of the coming Tuesday's RBA meeting. Long-term Australian government bond yields rallied, with the curve steepening. The Australian dollar strengthened by 0.2% against the US dollar as the improvement in the outlook for global growth and gradual stabilisation in China reduced the downside risk for the domestic economy and currency.
MSCI Emerging Markets Index closed the week down -1.2% (-2.6% in September, 2.1% YTD), with a positive contribution to performance from the stock market of Brazil and negative contribution from those of China, India and South Korea.
Chinese stocks fell in a holiday-shortened week as a lack of positive news on the economy dampened investor sentiment. The Shanghai Stock Exchange Index lost -0.7% (-0.2% in September, 3.3% YTD) and the blue-chip CSI 300 Index gave back -1.3% (-2.0% in September, -2.5% YTD) for the week ended Thursday. Stock markets in mainland China were closed Friday, the start of a 10-day holiday for the Mid-Autumn Festival and National Day, and will reopen Monday, 9 October. In Hong Kong, the benchmark Hang Seng Index dropped -1.4% (-2.6% in September, -6.8% YTD) for the week ended Friday.
In Hungary, the National Bank of Hungary (NBH) has been reducing certain interest rates in the last few months in an attempt to normalise what policymakers considered an “extraordinary” interest rate environment that has been in place since October 2022. At that time, policymakers were confronted with financial market turbulence and a weakening forint currency that exacerbated already-high inflation and forced them to raise certain interest rates sharply.
While the central bank’s base rate has remained at 13.0%, the NBH has reduced the overnight collateralised lending rate – the upper limit of an interest rate “corridor” for the base rate – in several steps, from a peak of 25.0% in late 2022 and early 2023 to 14.0% on 26 September. The central bank last week reduced the overnight deposit rate, which is the lower limit of that corridor, to 12.0% from 12.5%. In addition, the central bank has been reducing its depo rate – the interest rate paid on optional reserves – in several 1% increments. On Tuesday, policymakers reduced the depo rate to 13.0%, completing its convergence with the base rate.
According to the NBH’s post-meeting statement on 26 September, policymakers have “concluded” the normalisation of the extraordinary interest rate environment, with monetary policy entering “a new phase” in which the base rate “will become the effective central bank interest rate” and the interest rate corridor will be symmetric. Policymakers, however, did not signal that interest rate reductions would continue; rather, they asserted that “monetary conditions need to remain tight” and that “a cautious approach to monetary policy is warranted,” even though they expect annual inflation to fall to between 7% and 8% toward the end of 2023.
T. Rowe Price credit analyst Ivan Morozov believes that the central bank may continue cutting rates, though the size of additional interest rate reductions could be smaller. He also believes that policymakers will be watching the forint closely and could decide to pause rate cuts if the currency weakens materially.
In Brazil, the central bank published early in the week the minutes from its most recent policy meeting, and, according to T. Rowe Price sovereign analyst Richard Hall, the tone was on the hawkish side. For example, policymakers suggested that there are risks that the neutral level of real (inflation-adjusted) interest rates is higher than they had previously thought and that the output gap is likely narrower than they had estimated. They also noted that the El Niño weather phenomenon presents upside risks to food inflation. While Hall detected some hints of dovishness in the minutes – such as central bank officials noting that inflation data have been benign, and that potential growth might have increased due to structural reforms – he does not believe that policymakers are preparing to accelerate the pace of interest rate cuts.
Last week, the Bloomberg Global Aggregate Index (hedged to USD) returned -0.6% (-1.7% in September, -1.8% in the third quarter, 1.1% YTD), Bloomberg Global High Yield Index (hedged to USD) -0.6% (-1.1% in September, 5.5% YTD) and Bloomberg Emerging Markets Hard Currency Aggregate Index -1.0% (-2.4% in September, 1.1% YTD).
Higher oil prices contributed to concerns that inflation could prove more difficult for central banks to tame, spurring a sell-off in bonds. As the week wore on, the increasing likelihood of a US government shutdown may also have weighed on investor sentiment. The yield on the benchmark 10-year US Treasury note peaked above 4.6% on Wednesday. However, yields ticked modestly lower after the release of encouraging eurozone and US inflation data. Over the week, the 10-year Treasury yield increased 13 basis points (bp), up to 4.57% from 4.44% (up 46bp in September and 70bp YTD). The 2-year yield decreased -6bp, down to 5.05% from 5.11% (up 18bp in September and 62bp YTD).
European government bond yields broadly climbed as investors focused on the higher-for-longer rates narrative in financial markets. Germany’s benchmark 10-year bund yield rose to nearly 3% – a level unseen in more than a decade – before backing off this high on Friday. Over the week, the 10-year bund yield increased 10bp, ending at 2.84% from 2.74% (up 38bp in September and 27bp YTD). Italian bond yields also advanced amid concerns that the government would need to increase debt issuance next year to finance a bigger deficit.
In the UK, the yield on the benchmark 10-year gilt climbed above 4.5% before retreating a bit on Friday. Over the week, the 10-year gilt yield increased 20bp, to 4.44% from 4.24% (up 8bp in September and 77bp YTD).
The yield on the 10-year Japanese government bond (JGB) rose to 0.76% from 0.74% at the end of the previous week. The JGB yield reached its highest level in over a decade, despite the BoJ stepping into the market to buy JPY 300 billion (USD 2 billion) of JGBs with maturities between five and 10 years. This follows the BoJ loosening its yield curve control policy in July to allow rates to rise more freely, although it effectively caps them at 1%.
Yoram Lustig, CFA
Head of Multi Asset Solutions,
EMEA and LATAM
Michael Walsh, FIA, CFA
Solutions Strategist
Niklas Jeschke, CFA
Solutions Analyst
Eva Wu,
Solutions Analyst
202309-3130488
Notes
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