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The Week in Global Markets
Financial markets summary:
– EUROPE: This week, the stock markets across Europe advanced as investors likely hope that the stimulus wave in China and further interest rate cuts by the ECB and other major central banks can help reignite slowing business activity. PMI readings were disappointing for the Eurozone and Germany, but still expansionary in the UK. The euro and the pound both strengthened against the USD, however, while German 10y government bond yields fell, UK 10y yields rose. A recently released economic and financial report by ex-ECB president Draghi criticizes the productivity chasm between the US and the EU over the past two decades and puts focus on the significant deterioration of the EU’s international competitiveness as a result. There has been insignificant investment, innovation and consolidation of financial markets but even more importantly – the report highlights that the EU has suffered from overregulation and bureaucracy as well as from the recent political fragmentation on the old continent.
– UNITED STATES: Major US stock indices were up week-on-week, supported by the Fed’s 50bp rate cut as well as the moves in the chemicals and materials sectors which were propped up by expectations of higher demand from China as a result of the stimulus measures there. The Fed’s favorite inflation measure (PCE) showed further progress toward the long-term inflation target, while personal income and expenditure surprised negatively this week. Consumer confidence also disappointed, moving sharply downward as the perception of labor market conditions fell to near-recession levels. Even as mortgage rates have begun to come down, this has not yet fully cascaded to the property markets – new home sales declined in August.
– ASIA-PACIFIC: Japanese stocks rose this week, with the major indices Nikkei 225 and the TOPIX increasing significantly during the week. These moves were likely supported by the relatively more dovish perception of the BoJ’s comments and the sensitivity of Japanese exports to news about the Chinese economy. The Tokyo CPI index shows that inflation is likely slowing down further, as expected, while the PMI data show that the private sector saw another expansion in activity in September. Chinese stocks basically went vertical this week as the PBoC did a second cut of its reserve ratio requirements for banks, as well as cut the 7-day reverse repo rate and the medium-term lending facility rate, and the government vowed to increase fiscal spending further to help stop the downturn, especially in support of the ailing real estate sector. All major equity indices rose over 12% on the week. There will be an issuance of 2tn RMB of special sovereign bonds, of which 1tn RMB is targeted towards a revival of domestic consumption. Whether or not this stimulus package can provide sufficient momentum for the Chinese economy to grow sustainably on its own in the long run according to its previous growth trajectory (pre-Covid) is, however, debatable.
– BITCOIN: The US macro data and the stimulus announced in China seem to have also excited crypto investors, as Bitcoin rallied and reached levels around $66k where it is currently hovering. However, BTC is yet to reach its first “higher high” since March this year, as it failed to do so already for many months despite its periodic drops and recoveries. The latest reading of investor sentiment (the fear and greed index) shows that it has reached levels corresponding to greed, compared to the fear and neutral readings seen last month and last week, respectively.
policy rate overview
The last 2 weeks have been quite dynamic on the central bank front. There were a lot of rate cuts and a hike, but a number of major banks also left rates unchanged. The most anticipated move was by the Federal Reserve – which decided to act boldly and cut by 50bps directly as it determined that there has been good sustained progress on disinflation. Past data show that if a recession is avoided, in the year after the first rate cut, stocks generally perform well, with value, emerging markets and small caps performing better, while the yield curve usually steepens. This of course hinges on the expectation that a soft landing will be achieved, which so far the data appears to support. This new cutting cycle does not mean that there will be a stop on the balance sheet reduction – the holdings of treasury securities and mortgage-backed securities will keep declining with an updated cap of $25bn and $35bn, respectively.
In the statement provided by the FOMC, the reasons are highlighted – including inflation but also the fact that economic activity has continued to expand at a solid pace, while the labor market has weakened with the unemployment rate rising slightly and staying low. The FOMC kept its GDP growth forecasts for 2024, 2025 and 2026 mostly unchanged at around 2%, while increasing its unemployment expectation for all years but peaking at 4.4%. Also, it decreased its core inflation assumption for 2024 to 2.6% and to 2.2% in 2025. This further bolsters the Fed’s view of being able to accomplish a soft landing. There could be 2 more rate cuts in 2024.
The Bank of England (BoE) kept its policy rate unchanged at the 5% level amid concerns that inflation could be accelerating in the services sector. The Bank of Japan (BoJ) decided that it would approach future rate hikes cautiously, suggesting that there is no rush to increase rates further at the moment. Policymakers prefer to keep monitoring volatility in financial markets considering the impact of the previous rate hike. The Brazilian Central Bank raised rates from 10.5% per year to 10.75% per year, contrary to what its counterparts are doing worldwide. Some economists consider this increase unnecessary but there are fears that inflation could rise further due to the current droughts and fires in the country. Other countries that cut in the last 2 weeks include: Mexico, Sweden, Czechia, Hungary, Switzerland, Saudi Arabia and South Africa. Rates were kept unchanged in Norway, Türkiye and China.
highlights from Germany
Another drop in the business climate
Companies in Germany appear to be still losing confidence in the business environment – as sentiment drops again in September. The assessment of the current business situation fell particularly strongly and the expectations for the coming months became more pessimistic. The lack of orders continues to be a major drag on the ailing manufacturing sectors in the country and both the current environment and the outlook are becoming ever more negative. Skepticism about the coming quarters is also significant in trade, but it is less pessimistic in construction and services. However, satisfaction with the current economic situation has declined in all three. The Cycle indicator is clearly in a contraction territory for a third month running.
The ZEW index points to the same
Two weeks ago, the ZEW index pointed towards the same deterioration in economic sentiment. It plummeted to 3.6 points, with optimism almost completely evaporating. The assessment of the current economic situation has also deteriorated again – declining to -84.5, getting closer to the low of the pandemic era. Despite the interest rate cuts, hopes for an improvement in the economic environment are quickly dwindling.
The PMI confirmed what the other indicators suggested
The September Flash PMI showed that the German economy sank deeper into contraction, dragged down by manufacturing sector. Business activity fell at the fastest rate in 7 months with an accelerated reduction in manufacturing production compounded by a near-stalling of growth in the service sector. Surveyed businesses highlighted increased caution among customers and associated investment reticence, with concerns about the health of the economy reported to be a factor. Inflows of new business domestically and related to exports fell. Firms’ increased willingness to trim workforce numbers also coincided with a substantial deterioration in their expectations towards activity in the coming year.
highlights from Europe
Economic sentiment remains broadly stable
The Economic Sentiment Indicator (ESI) for September barely changed for the EU and the Eurozone. This is the result of improved confidence in construction and among consumers, offset by a decrease in industry confidence. Confidence in services and retail trade remained broadly stable. For the largest EU economies, the ESI worsened markedly in France and Germany, while it improved significantly in Poland, Spain, Italy and, more moderately, in the Netherlands.
Business activity declines
For the first time in 7 months, the Euro area PMI moved into contraction territory in September as private sector output fell. New orders and volumes of outstanding business fell and business confidence reached at a ten-month low. Companies scaled back their workforce for the second month in a row. Reductions in manufacturing output were particularly marked in Germany and France, but the rest of the eurozone also posted a fall. The eurozone service sector managed to eke out some growth in activity at the end of the third quarter, but the latest expansion was only marginal and the slowest since February.
highlights from The united States
Inflation continues to decelerate, according to the Personal Consumption Expenditures report
In August, headline PCE rose by 2.2% YoY, slightly below expectations and the lowest reading since Feb-21. Meanwhile, core PCE rose by 2.7% YoY, in line with consensus expectations, while the monthly gain of 0.1% was below expectations for a 0.2% gain. The 3-month annualized change in core PCE is now 2.06%, which is basically at the Fed’s target for the second month running. Goods prices deflated, falling by 0.2% in August and declining for the fourth consecutive month, while services prices increased by 0.2%, with housing inflation still running stubbornly high, rising by 0.5% MoM.
Upturn in activity
According to the S&P Global Flash PMI for September, US activity growth was robust, signaling a sustained economic expansion over Q3. A moderation of order book growth and a deterioration in business expectations for the year ahead to a near 2-year low reflected heightened uncertainty ahead of the Presidential Election. Growth remained uneven by sector: in the service sector activity grew at a solid pace, but manufacturing output fell for a second successive month, although dropping only modestly and at a slower rate than in August.
highlights from The united Kingdom
Activity continues to rise
Flash PMI data for September show that UK private sector firms experienced a sustained growth in activity for the month. Nevertheless, the rate of growth slowed down for both manufacturing and services, reflecting the moderation in the overall speed of recovery for the first time since June. A weaker rise in prices charged by service providers more than offset an acceleration in factory gate price inflation. However, there were still signs of elevated cost pressures in September. Private sector employment growth slowed for the second month running to its weakest since June.
Author: Nikolay
Founder of MoneyCraft
