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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
Wednesday’s release of the eagerly anticipated August consumer price index (CPI) data showed that the Federal Reserve (Fed) has made progress in its fight against inflation, but rising energy prices may prompt the central bank to further tighten monetary policy. The headline CPI numbers showed the largest monthly increase since August 2022, which was the widely expected effect of higher gasoline prices. The core (excluding food and energy) CPI increase was slightly higher than expected, but markets took the news in stride.
Similarly, the August producer price index (PPI) data released on Thursday indicated that headline producer prices climbed more than expected, with core PPI in line with expectations. Retail sales for August were strong, demonstrating that consumers remain willing to spend.
The week’s economic data overall did not seem to affect the market’s outlook for the Fed to hold rates steady at its 19–20 September policy meeting. Much of the data appeared to reinforce building expectations for a soft-landing scenario in which inflation cools to the Fed’s target without a deep recession. In fact, Wall Street’s widely followed “fear gauge,” the Chicago Board Options Exchange Volatility Index, or VIX, hit its lowest point since before the onset of the covid pandemic in early 2020.
Europe
The European Central Bank (ECB) raised interest rates for the 10th consecutive time and hinted that it could be nearing the end of its monetary tightening campaign. ECB President Christine Lagarde said a “solid majority” of policymakers had backed the hike of 25 basis points (bp) that took the key deposit rate to 4.0%, a record high. The ECB said that the move meant “interest rates have reached levels that, maintained for a sufficiently long duration, will make a substantial contribution to the timely return of inflation to the target.”
Data from the EU’s statistics office indicated that industrial production in the eurozone weakened by more than expected in July, dropping -1.1% sequentially because of sharp declines in the output of durable consumer and capital goods.
The European Commission (EC) cut its forecast for GDP growth in the eurozone in 2023 to 0.8% from 1.1% and projected that the German economy, the largest in the area, would shrink by -0.4%. The EC’s previous estimate had called for Germany’s GDP to expand by 0.2%.
The UK
The UK economy shrank faster than expected in July due to worker strikes, wet weather and rising borrowing costs, the Office for National Statistics said. GDP fell -0.5% sequentially, after rising by the same amount in June. However, the rolling three-month growth rate increased 0.2%, thanks to expansions in services, production and construction.
UK unemployment unexpectedly increased to 4.3% in the three months through July, up from 4.2% over the previous three months. This jobless rate exceeded the 4.1% that the Bank of England had forecast for the third quarter. But total wage growth over the three months through July accelerated year over year to a greater-than-expected 8.5%.
Japan
Bank of Japan (BoJ) Governor Kazuo Ueda suggested that the central bank could have enough data by year-end to judge if wages will continue to rise and thereby determine whether it could end its policy of negative interest rates (given sustained wage growth is key to the achievement of its 2% inflation target). The comments were perceived as hawkish, even though Ueda was careful to emphasise that policy normalisation is still a ways off. Ueda’s remarks were also regarded by some investors as a verbal intervention in response to historic weakness in the yen.
While the yen strengthened following Ueda’s comments, it lost ground to finish the week broadly unchanged at the upper end of the JPY 147 range against the US dollar (ending at JPY 147.9 for USD from JPY 147.8 at the end of the previous week). Due to the interest rate differential between Japan and the US, the yen continues to hover around its lowest level in around three decades.
Prime Minister Fumio Kishida reshuffled his cabinet, as had been widely anticipated, but kept intact his core economic policy team, which is tasked with introducing new stimulus measures in October. After the reshuffle, Kishida said he would continue gasoline subsidies, given households are facing an environment in which price gains erode their purchasing power, especially as wage growth is not yet keeping pace. He asserted that his new cabinet would take steps to ensure that wage growth consistently exceeds the rate of inflation by several percentage points and that Japan is fully out of deflation.
China
Official data for August provided evidence of economic stabilisation in the country. Industrial production and retail sales grew more than forecast last month from a year earlier, while unemployment unexpectedly fell from July. However, fixed asset investment growth missed forecasts due to a steeper decline in real estate investment. New bank loans rose an above-consensus RMB 1.36 trillion in August, up from July’s RMB 345.9 billion. Credit expansion was mostly driven by corporate demand, while household and longer-term loans also grew.
Inflation data revealed that consumer prices returned to growth after slipping into contraction in July. The consumer price index rose 0.1% in August from a year earlier, up from July’s -0.3% decline. Meanwhile, the producer price index fell -3% from a year ago as expected but eased from the -4.4% drop the previous month. The inflation readings provided more evidence that the worst may be over for China’s slowing economy, which led Beijing to issue a flurry of stimulus measures in recent weeks aimed at jumpstarting demand.
In monetary policy news, the People’s Bank of China (PBOC) cut its reserve ratio requirement by 25bp for most banks for the second time this year to inject more liquidity into the financial system. The central bank also rolled out RMB 591 billion into the banking system compared with RMB 400 billion in maturing loans. Many economists predict that the PBOC will engage in further policy easing for the rest of 2023 as the government tries to boost China’s post-pandemic economy, which has been losing momentum following a brief first-quarter rebound.
Australia
Australia employment increase sharply by 64,900 in August, stronger than market consensus of 25,000. However, it is worth noting that the strength in the month was almost entirely driven by part-time workers (62,100), with hours worked decreasing by -0.5% month on month. The unemployment rate stayed unchanged at 3.7% and the participation rate rose to 67.0%. Meanwhile the underemployment rate increased to 6.6% from 6.4%. The Reserve Bank of Australia needs to calibrate this monthly print carefully as a softening of the labour market is key to meeting longer term inflation targets. Australia new house sales reported by the country’s largest home builders rose in August, yet housing price growth across Australia’s major capital cities eased slightly in September-to-date.
Markets
Last week, the MSCI All Country World Index (MSCI ACWI) gained 0.5% (14.5% YTD).
In the US, the S&P 500 Index closed with a small loss of -0.1% (17.3% YTD). The major equity indexes finished mixed, with value stocks leading the market as Brent oil price rose above USD 93 per barrel for the first time since November 2022. Large-cap shares outperformed small-caps. The Russell 1000 Growth Index returned -0.7% (29.7% YTD), the Russell 1000 Value Index 0.5% (5.4% YTD) and the Russell 2000 Index -0.2% (6.0% YTD).
Technology and growth stocks lagged after Apple’s new product introduction event on Tuesday that featured a price increase on its top-of-the-line iPhone 15. The products received mixed reviews, which also seemed to dampen sentiment toward the technology sector over the course of the week. However, broad market sentiment received a boost from the largest initial public offering of 2023 as shares of UK microchip designer Arm started trading on the Nasdaq on Thursday and experienced a first-day price jump. Over the week, the technology-heavy Nasdaq Composite declined -0.4% (31.8% YTD).
In Europe, the MSCI Europe ex UK Index added 1.2% (12.2% YTD) after the ECB raised interest rates but signalled that borrowing costs may have reached a peak. Better economic data out of China also appeared to lift investor sentiment. Major continental stock indexes advanced. Germany’s DAX Index tacked on 0.9% (14.1% YTD), France’s CAC 40 Index firmed 1.9% (17.1% YTD) and Italy’s FTSE MIB Index climbed 2.3% (26.7% YTD). Switzerland’s SMI Index moved up 2.3% (7.5% YTD). The euro was little changed versus the US dollar, ending the week at USD 1.07 for EUR.
In the UK, the FTSE 100 Index jumped 3.1% (6.6% YTD), helped by the depreciation of the UK pound versus the US dollar. The pound ended the week at USD 1.24 for GBP, down from 1.25. A decline in the UK currency helps to support the index, which includes many multinational companies that generate meaningful overseas revenue. The domestically focused FTSE 250 Index was up 1.8% (2.1% YTD).
Japan’s stock markets gained over the week. The Nikkei 225 Index added 2.8% (30.1% YTD), the broader TOPIX Index increased 2.9% (30.2% YTD) and the TOPIX Small Index firmed 1.2% (23.3% YTD). Positive Chinese economic data, amid tentative investor anticipation that the country’s stimulus efforts are having the intended effect on growth and markets, supported sentiment. Strength in US stocks and yen weakness, benefiting Japan’s exporters, added to the favourable investment backdrop.
In Australia, the S&P ASX 200 Index rose 1.9% (8.4% YTD) as strong US economic readings reinforced the “soft landing” view and China industrial production and retail sales beat lifted up spirits. The August Australia employment data did little to move Australian government bond yields. The Australian dollar strengthened against the US dollar by 1.3%.
MSCI Emerging Markets Index closed the week up 1.3% (5.5% YTD), with a positive contribution to performance from the stock market of Taiwan, India, South Korea and Brazil.
Chinese equities were mixed after official indicators revealed that the country’s economy may have bottomed, although data also pointed to ongoing weakness in the property market. The Shanghai Stock Exchange Index was broadly flat, adding 0.1% (3.5% YTD), but the blue-chip CSI 300 Index shed -0.8% (-2.0% YTD). In Hong Kong, the benchmark Hang Seng Index was broadly flat, increasing 0.1% (-4.9% YTD).
In Türkiye, the central bank introduced additional monetary measures intended to limit the attractiveness of bank deposits protected from foreign exchange (FX) fluctuations. Specifically, the central bank raised the reserve requirement ratio (RRR) for FX-protected deposits with maturities up to six months to 25% from 15%, and it reduced the RRR with maturities over six months to 5%. For perspective, more than 80% of Türkiye’s FX-protected deposits have maturities of less than six months.
According to T. Rowe Price sovereign analyst Peter Botoucharov, the risk to the ongoing fight against FX-protected deposits is potential outright demand for US dollars, as local investors and consumers switch back from FX-protected deposits to either lira deposits or plain vanilla deposits denominated in dollars or other currencies. While Botoucharov expects to see further central bank measures to make non-lira deposits less attractive, he also believes that interest rates on lira deposits need to offer an attractive alternative. At present, commercial banks’ deposit rates are hovering around 30%; these would need to rise to at least 40% to 45% to be more attractive in an environment where 12-month inflation expectations are about 50%.
In Brazil, the government reported that inflation in August was lower than anticipated: 0.23% month over month versus expectations of 0.28%. The headline year-over-year inflation rate increased to 4.6%, which T. Rowe Price sovereign analyst Richard Hall says is not surprising because the base effects from former President Jair Bolsonaro’s preelection energy price cuts have dropped off the annual number.
Hall believes that the underlying details of the inflation report look relatively positive. There were two trends that somewhat offset each other, as food price deflation accelerated in August while electricity prices moved higher on a regulatory price change. Regarding core inflation, Hall notes that core services inflation – which is sensitive to monetary policy changes – seems to have moved lower, while there was some pressure in core goods categories, such as beauty products and clothing. Hall concludes that the latest data provide stronger evidence of ongoing disinflation in the Brazilian economy.
Last week, the Bloomberg Global Aggregate Index (hedged to USD) returned -0.2% (2.1% YTD), Bloomberg Global High Yield Index (hedged to USD) 0.2% (6.7% YTD) and Bloomberg Emerging Markets Hard Currency Aggregate Index -0.2% (2.7% YTD).
US Treasury yields increased modestly over most maturities. The 10-year US Treasury yield increased 6bp during the week, up to 4.33% from 4.27% (up 46bp YTD). The 2-year yield increased 5bp, up to 5.04% from 4.99% (up 61bp YTD).
European government bond yields broadly declined on hopes that the ECB may have finished raising interest rates. However, the yield on the 10-year German government bund increased 6bp over the week, ending at 2.67% from 2.61% (up 11bp YTD).
Bond yields in the UK weakened after a bigger-than-expected drop in monthly GDP in July. The yield on UK 10-year gilt decreased -7bp, from 4.42% to 4.35% (up 69bp YTD).
As a result of the speculation about potential BoJ monetary policy normalisation, Japanese government bonds (JGBs) slumped, sending the yield on the 10-year JGB to 0.71%, the highest since 2013, from 0.65% at the end of the prior week.
Issuance was heavier than expected in the US investment-grade corporate bond market, with the new supply mostly made up of shorter-maturity bonds. According to T. Rowe Price traders, the high yield bond market was mainly focused on the busy primary calendar, and sellers seemed to be making room for new issues. Similarly, bank loan market participants appeared to concentrate on newly issued loans.
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
202309-3118755
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