By Jan Faure
Global markets were weaker in August, but recovered from mid-month lows, as higher-for-longer interest rate expectations weighed on risk assets. Developed market equities declined 2.6% for the month (MSCI World) while emerging market equities were decidedly weaker, with the MCSI Emerging Markets index declining 6.4%, reflecting Chinese growth fears, higher sovereign bond yields and renewed tension in the Chinese property market.
In the US, both the S&P 500 index and NASDAQ Composite index declined by 1.8% and 2.2% respectively, despite relative economic strength. Jerome Powell’s much anticipated Jackson Hole speech was well received by investors. The Fed chair asserted that monetary policy will remain data dependent, leaning towards tightening if necessary. Powell acknowledged the encouraging trend of declining inflation but reiterated that achieving the Fed’s 2% inflation target would likely require a period of below-trend economic growth and some softening in labour market conditions.
Global investment grade bonds were weaker (Bloomberg Global Aggregate Bonds -1.4% MoM) as stubborn inflation data raised the prospect of another round of central bank interest rate hikes this year. After thirteen consecutive monthly declines in the US inflation rate, headline inflation (CPI) increased slightly in July to 3.2% YoY from 3.0% YoY in June. Core inflation, which excludes more volatile food and energy components, edged down to 4.7% YoY from 4.8% YoY the prior month.
Overall, economic data has pointed to resilience of the US economy - inflation has moderated and economic growth has been better than expected, helped by a resilient services sector. US retail sales gained for the fourth month in a row in July, pointing to durable consumer spending despite higher prices and borrowing costs. The ‘soft landing’ narrative has gained ground as rate hikes have started to impact the right areas – a loosening in tight labour markets (supported by lower job openings data).
European equity markets witnessed a downturn in August, with the Euro Stoxx 50 index declining 3.9%, closely followed by the UK’s FTSE 100 index which retreated by 3.4%. Eurozone headline inflation continues to exceed the European Central Bank’s 2% target, resulting in ongoing market expectations of further ECB rate increases before the end of the year. In the UK, the Bank of England (BOE) implemented a 25bps policy rate hike, bringing the policy rate to 5.25%. The BoE maintained its intention to hold rates at restrictive levels for an extended duration. Meanwhile, UK headline inflation dropped to 6.8% YoY in July (from 7.9% YoY in June), with falling energy and food prices the largest contributors for the decline.
In the Asian markets, Japan’s Nikkei 225 index declined 1.7% while Hong Kong’s Hang Seng index slumped 8.5%. Chinese headline inflation fell into deflation territory in July after dropping by 0.3% YoY (from 0% YoY in June). The country’s stats agency believes the decline in CPI will be temporary and anticipate a gradual rebound in inflation as last year’s high base effects fade.
The Chinese economy is grappling with persistent challenges, including weak consumer demand, as its citizens prioritise reducing debt (saving) over consumption. This has manifested in several concerning economic indicators, such as slowing retail sales, reduced manufacturing activity, negative trends in import and export growth, and an embattled real estate sector. In response, the Chinese government has introduced a range of measures aimed at bolstering the economy and instilling confidence among consumers (and investors). Despite the most recent measures being well received, there remains a high degree of scepticism regarding their potential to stimulate lending, given that the underlying issue revolves around weak credit demand.
Table 1: Global Indicators – Local reporting currencies
