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The Week in Global Markets
Financial markets summary:
– EUROPE: Positive inflation news from the euro area and Germany likely contributed to the gains in the European stock markets this week. The German DAX index reached a new all-time high, while German 10y government bond yields rose as inflation finally fell below the 2% target, according to preliminary estimates for August. Euro area economic sentiment has brightened somewhat, but unfortunately, that is not the case in Germany yet. ECB members reiterated their cautious approach to cutting rates, which should not be rushed. In the UK, the FTSE 100 also advanced on the week and 10y government yields rose as well. While the pound strengthened further against the dollar, however, the euro weakened once again below the 1.11 level.
– UNITED STATES: While the S&P 500 and the Dow gained a bit this week, the tech-heavy Nasdaq index declined driven by the negative market reaction to its earnings report. Investors seem to be anxious about the ability of the tech giant to keep up with earnings expectations, some analysts even suggesting that the market is basically ready to punish anything other than a blowout performance relative to expectations. However, positive macro news such as the PCE release and consumer sentiment were largely in line with or better than expectations, helping support optimism in the markets.
– ASIA-PACIFIC: The major Japanese stock indices Nikkei 225 and TOPIX both recorded gains over the week, basically recuperating during August most of what was lost after the crash at the start of the month. However, investors need to stay vigilant as the hawkish stance of the Bank of Japan will probably remain given the regional inflation data coming out. This is in line with statements from BoJ governor Ueda on the normalization of monetary policy. In China, corporate earnings seem to disappoint so far, causing stock indices to move down week-on-week, including the Shanghai Composite and the CSI 300. Some economists are now reducing their 2024 growth forecasts on account of the prolonged weakness in domestic demand and the persistent issues in the property sector. The People’s Bank of China injected RMB 300bn into the banking system (using the medium-term lending facility) and left the lending rate unchanged at 2.3%. The banking system was also supported with a short-term 7-day reverse repo of RMB 471bn.
– BITCOIN: Bitcoin’s price in USD seems to be stabilizing temporarily around the key support level of $58.5k, lower than when it was last week, most likely driven by a massive transfer of around $1.88 billion worth of Bitcoin on Monday. Market analysts suggest that this was the result of a 30,000 BTC internal transfer within Binance. AMBCrypto reported that many market participants have been cashing in on short-term Bitcoin rallies. Nevertheless, it appears that long-term holders of the largest cryptocurrency have increased their accumulation of late, signaling that many of them are taking advantage of the price falls.
policy rate overview
The Hungarian National Bank (MNB) decided to maintain its base rate unchanged at 6.75% in response to volatility in the financial markets and risks to the inflation outlook. The lower end of the interest rate corridor, the overnight deposit rate, remained at 5.75%, while the upper end, the overnight lending rate, stayed at 7.75%. The forint strengthened against major currencies after the announcement. The MNB remains cautious due to international risks and uncertainties, particularly regarding geopolitical tensions and the global economic slowdown. It suggests that any future moderation in interest rate conditions will depend on the policies of major central banks, the inflation outlook, and evolving risk perceptions.
highlights from Germany
Headline inflation finally below target
Preliminary August data from the German Statistical Office show that the headline CPI went down to 1.9% YoY and -0.1% MoM. The Harmonized ICP declined to 2% YoY and -0.2% MoM. The core rate excluding food and energy is expected to be 2.8%. Out of the main components, services inflation remains stubbornly high at 3.9%, while energy took a significant dive YoY, reaching -5.1%. Goods are also down while food inflation accelerated slightly to 1.5% vs. 1.3% last month.
Economic pessimism takes hold
The Ifo business climate index declined further in August, with a worsening outlook and a deteriorating assessment of the current business situation in Germany. The most considerable drop was in manufacturing: companies were significantly less satisfied with the current business climate and their expectations fell to the lowest level since Feb, with backlogs in decline and investment goods manufacturers experiencing particular difficulties. But service sector sentiment was also down as skepticism seems to be taking hold and the current environment is also worsening. In trade, less pessimistic expectations were somewhat offset by the worse current situation and in construction, it was vice versa – with expectations declining slightly. Economic uncertainty as a whole ticked up in August, while the cycle clock still points to a crisis. The traffic light indicator remains firmly in contraction territory, even worsening slightly compared to July.
Consumer sentiment is also getting worse
The latest GfK survey shows that consumer sentiment in Germany suffered a significant setback in August, with major drops in income and economic expectations and a decline in the willingness to buy. As the report highlights, “The euphoria of German Consumers triggered by the European Football Championship was only a brief flare-up and faded after the end of the tournament. Negative news about job security is making consumers more pessimistic and a fast recovery in consumer sentiment seems unlikely. Rising unemployment rates, an increase in corporate insolvencies and staff reduction plans at various companies in Germany are causing employees to worry about their jobs. Hopes for a stable and sustainable economic recovery must therefore be further postponed.” The concerns of households related to job security are offsetting the recent increase in purchasing power. Increasing risks of recession unsettle consumers and increase economic pessimism for the coming 12 months.
highlights from Europe
Inflation decelerates further
Flash estimates show that euro area annual inflation is expected to be 2.2% in August 2024, down from 2.6% in July. The Services component is expected to have the highest annual rate in August (4.2%, compared with 4.0% in July), followed by food, alcohol & tobacco (2.4%, compared with 2.3% in July), non-energy industrial goods (0.4%, compared with 0.7% in July) and energy (-3.0%, compared with 1.2% in July).
No major changes in money supply growth
The annual growth rate of the aggregate M1 (currency in circulation and overnight deposits) was -3.1% in July, lower compared to June. The annual growth rate of short-term deposits other than overnight deposits (M2-M1) decreased to 11.4% in July, while the annual growth rate of marketable instruments (M3-M2) increased to 21.0%. The annual growth rate of the broad monetary aggregate M3 stood at 2.3% in July 2024, unchanged from the previous month. The annual growth rate of adjusted loans to households increased to 0.5%, while the annual growth rate of adjusted loans to non-financial corporations stood at 0.6%, slightly lower than in June.
Sentiment slightly up
The Economic Sentiment Indicator edged up in both the EU (+0.4pt to 96.9) and the euro area (+0.6pt to 96.6) in August. This is the result of improved confidence in the industry, services and retail trade, while confidence
among consumers and in construction remained broadly stable. For the largest EU economies, the ESI improved strikingly for France (+4.3). It also improved significantly for Spain (+1.3) and the Netherlands (+0.9), while for Poland the ESI recorded only a slight increase (+0.3). The ESI deteriorated for Germany (-1.7) and Italy (-1.2). The Employment Expectations Indicator (+0.9) recovered in August after several months of decline. The indicator now scores very close to its long-term average. The increase reflected a considerable improvement in employment plans in services, which were moderated by worsening employment plans in industry, retail trade and construction.
highlights from The United States
Personal Consumption Expenditure below expectations
The Fed’s preferred measure (Core PCE) rose 2.6% YoY (less than the expected 2.7%), the same increase as in June. Headline PCE inflation increased 2.5% YoY – also less than expected and matching the June increase. PCE prices and core PCE prices both rose in line with expectations at 0.2% MoM. Core prices less housing, another key metric for the Fed, increased just 0.1% on the month. Shelter has proven to be stubborn, again rising 0.4% in July. On a 12-month basis, goods also were off by less than 0.1%, while services jumped 3.7%. Food prices were up 1.4% and energy accelerated 1.9%. There was not much reaction from the markets, as equity futures pointed to a slightly higher open on Wall Street and Treasury yields were higher as well. The market is pricing in a 100% chance of a September rate cut, with the only unknown now being the magnitude – 25bp or a more aggressive 50bp.
GDP growth higher in Q2
The second real GDP growth estimate came in at 3% this week, higher than expected and than the first estimate. Consumer spending, which accounts for about 70% of U.S. economic activity, rose at a 2.9% annual rate in Q2, up from 2.3% in the government’s initial estimate. Business investment expanded at a 7.5% rate, led by a 10.8% jump in investment in equipment.
highlights from The United Kingdom
Net individual borrowing and mortgage approvals increased
In July, net borrowing of mortgage debt by individuals increased to £2.8bn, the highest volume since Nov-22. The annual growth rate for net mortgage lending rose to 0.6%. Net mortgage approvals (i.e., net of cancellations) for house purchases increased to 62k in July, the highest since Sep-22. Net consumer credit borrowing rose to £1.2bn, with credit card borrowing remaining stable and net borrowing through other forms of consumer credit rising to £0.7bn.
The annual growth rate of borrowing by large businesses decreased, to 1.7% in July from 2.5% in June. By contrast, the annual growth rate of borrowing by SMEs increased, to -4.1% in July from -4.3% in the previous month. The net flow of sterling money (M4ex) was £10.2bn in July, up from £4.3bn in June. The net flow of M4ex was driven by households’ holdings of money, which increased by £5.7 billion in July.
Author: Nikolay
Founder of MoneyCraft
