Global Markets Weekly Update

U.S.

Stocks rebound after sell-off

Stocks managed to post solid gains and largely recovered from the previous week’s steep losses, which saw the S&P 500 Index suffer its worst weekly decline since March 2023. Growth stocks outpaced value shares by a wide margin, helped by strong performance from technology stocks. NVIDIA was a particularly strong contributor after the chip giant offered a positive outlook on artificial intelligence at an investment conference. T. Rowe Price traders noted that it was a busy week for conferences in general, which seemed to drive sentiment.

Core inflation slightly higher than expected

The week’s relatively light economic calendar was dominated by the Labor Department’s inflation reports. On Wednesday, stocks initially headed sharply lower following news that core (less food and energy) consumer inflation rose to 0.3% in August, a tick higher than consensus expectations. Meanwhile, headline inflation showed an annual increase of 2.5%, well below July’s increase of 2.9% and its lowest level since early 2021. In any case, our traders noted that the news from NVIDIA seemed to help drive a turnaround later Wednesday morning. 

Data also arguably suggested some minor glimmers of hope for the troubled housing sector. The Mortgage Bankers Association reported on Wednesday that the average rate for a 30-year, fixed-rate mortgage fell to 6.29%, the lowest level since February 2023 and well below the 7.21% year-ago level. The association also reported that its index of home loan applications—a leading signal of home purchases—continued to climb off its August lows.

Market focuses on size of Fed rate cut

Speculation over the week was focused on how much—not if—the Federal Reserve would cut interest rates at its upcoming policy meeting on September 17–18. The upside core consumer inflation surprise on Wednesday appeared to support the view that the Fed would cut rates by only 25 basis points (0.25 percentage points) instead of the 50 basis points some had come to expect following the relatively weak August payrolls report. However, by the end of the week, the futures market was indicating nearly even odds that the Fed would deliver a 50-basis-point cut. 

Treasury yields reach year-to-date lows

Treasury yields ticked lower during the week with the yield on the benchmark 10-year Treasury note trading at year-to-date lows. (Bond prices and yields move in opposite directions.) Tax-exempt municipal bond yields were little changed as investors eyed the heavy new issuance expected over the next few weeks. Muni inflows industrywide for the week ended Thursday represented the second-largest weekly total for the year to date. 

The investment-grade corporate bond market appeared quiet but healthy. Thursday saw the week’s only issuance, and shorter-maturity new bonds outperformed. Strong equity gains and anticipation of the Fed cutting rates at next week’s meeting aided the performance of high yield bonds.

Europe

In local currency terms, the pan-European STOXX Europe 600 Index ended the week 1.85% higher, lifted by an interest rate cut from the European Central Bank (ECB). Germany’s DAX rose 2.17%, France’s CAC 40 Index gained 1.54%, and Italy’s FTSE MIB added 0.83%. The UK’s FTSE 100 Index tacked on 1.12%.

ECB cuts rates again but gives no clues on future decisions

The ECB lowered its deposit rate for a second time this year, announcing a quarter-point cut to 3.5% that was in line with expectations. The move came amid signs of weakening economic growth and slowing inflation in the eurozone. The statement accompanying the announcement emphasized that the ECB remains cautious and indicated that the ECB is not “pre-committing to a particular rate path.” 

The updated quarterly forecasts for headline inflation remained unchanged, but core inflation was revised slightly higher for the next two years due to stronger-than-expected services prices. The ECB now expects the economy to expand by a percentage point less this year (0.8%) and in 2025 (1.3%) and 2026 (1.5%).

Wieladek: Quarterly rate moves most likely

T. Rowe Price European Economist Tomasz Wieladek said that he believes financial markets are pricing in too much policy easing. While some survey indicators are showing that the economy is beginning to contract, activity in manufacturing and some other areas are holding up. He notes that labor markets remain tight and that services inflation has not slowed below 4.0% since November. In his view, negotiated wages in the eurozone are likely to rise above 4% in the third quarter and could stay at those levels until mid-2025. The potential for volatility in these data series suggest that the ECB is likely to remain cautious and may look to lower borrowing costs at a quarterly pace.

UK GDP stagnates; pay growth eases

The UK economy was unchanged for a second consecutive month in July as manufacturing output contracted. Economists had expected growth of 0.2%. However, over the three months ended July 31, inflation-adjusted gross domestic product (GDP) expanded by 0.5% sequentially.

Pay growth slowed as well, but the labor market appeared to remain tight. Average earnings, excluding bonuses, increased 5.1% from year-ago levels for the three months through July—down from 5.4% in the February-to-April period. Nevertheless, wages are still growing at almost double the rate that the Bank of England judges to be compatible with keeping inflation at 2%. 

Japan

Japan’s stock markets registered mixed performance over the week, with the Nikkei 225 Index gaining 0.5% and the broader TOPIX Index down 1.0%. The country’s exporters continued to face currency headwinds as the yen strengthened to the high end of the JPY 140 range against the USD, from the prior week’s JPY 142.3 amid a hawkish outlook on the Bank of Japan’s (BoJ’s) monetary policy. 

Policymakers’ comments point to additional rate hikes

Expectations that the BoJ will raise interest rates again this year were supported by the latest comments from members of the central bank’s board. Junko Nakagawa reiterated that the degree of monetary easing will be adjusted if the outlook for Japan’s economy and inflation is realized, as the current level of real rates is extremely low. Naoki Tamura suggested that the short-term rate needs to be raised to at least around 1% in the second half of the BoJ’s projection period through fiscal 2026 to curb upside inflation risks and maintain price stability.

Despite these hawkish comments, the yield on the 10-year Japanese government bond fell to 0.84% from 0.86% at the end of the previous week—as it tracked U.S. bond yields lower on speculation that the Fed could deliver a more aggressive 50-basis-point interest rate cut at its September meeting. 

On the economic front, Japan’s second-quarter gross domestic product (GDP) growth was revised lower. According to final data, the economy expanded an annualized 2.9% quarter on quarter, less than the 3.1% growth suggested by the preliminary reading and market forecasts of 3.2%. The contribution from private consumption and capital expenditure was weaker. In inflation developments, the consumer goods price index rose 2.5% year on year in August, slowing from the previous month’s 3.0% and below consensus estimates of 2.8%. The rebound in the yen has caused a sharp fall in import cost growth. 

China

Chinese stocks declined as weak inflation data spurred concerns about a downward price-wage spiral weighing on the economy. Both the Shanghai Composite Index and the blue chip CSI 300 fell 2.23%. In Hong Kong, the benchmark Hang Seng Index gave up 0.43%, according to FactSet.

China’s consumer price index rose 0.6% in August from a year earlier, up from 0.5% in July, but below economists’ forecasts. Core inflation, which strips out volatile food and energy costs, increased 0.3%, slowing from July’s 0.4% rise, and marked the lowest level in over three years. The producer price index fell 1.8% from a year ago, lagging forecasts and deepening from July’s 0.8% drop, extending the deflation in factory gate prices that began in late 2022. The latest data spurred calls for Beijing to roll out more forceful measures to stave off a negative cycle of falling corporate revenue, wages, and spending that many analysts believe threatens China’s longer-term growth. 

Meanwhile, exports exceeded forecasts in August, rising 8.7% from a year earlier, up from 7% growth in July. Imports expanded a lower-than-expected 0.5% in August, easing from July’s 7.2% gain. The overall trade surplus increased to USD 91.02 billion from USD 84.65 billion in July. China’s exports have been a bright spot for its economy, which is mired in a prolonged property crisis. However, analysts cautioned that overseas demand could face volatility due to the slowing U.S. economy and rising trade tensions.

Other Key Markets

Hungary

Despite lower inflation, fiscal developments and currency weakness may discourage rate cuts

Earlier this week, the government reported that inflation in August was 3.4%. This was lower than expected and lower than the 4.1% inflation reading for July. According to T. Rowe Price credit analyst Ivan Morozov, the downside surprise was mostly driven by food and transportation costs. The moderation in core inflation—now at a year-over-year rate of 4.6%—was limited, although core momentum visibly slowed to a month-over-month rate of 0.2%. While a lower inflation reading could pave the way for more central bank interest rate cuts, Morozov believes that recent negative fiscal news—specifically Prime Minister Viktor Orban’s call for higher fiscal spending ahead of the general election in 2026—and relative forint weakness versus the euro may discourage the National Bank of Hungary from reducing rates at a faster-than-signaled pace.

Czech Republic

Disinflation trend ends, but Czech inflation is broadly stable

The Czech government reported earlier this week that inflation in August was 2.2%, which matched the July reading but was higher than expected. According to Morozov, core consumer price index inflation momentum slightly accelerated on a month-over-month basis. He believes that the disinflation trend in the Czech Republic has ended and that inflation remains broadly stable in the 2% to 3% range. That said, he also believes that the central bank will likely continue cutting interest rates incrementally given the weakness of the economy.