As we start a new week, let's take a look at the significant events in the global economy over the past week with our weekly financial update, presented by Bas Kooijman, the CEO and Asset Manager of DHF Capital SA.
The U.S. stock market soared to new highs last week, fueled by investor optimism over a significant rate cut by the Federal Reserve. Major indexes like the S&P 500 and Dow Jones Industrial Average reached record levels, with smaller-cap indexes such as the Russell 2000 also showing gains, though still lagging behind their historic peaks. Investors celebrated what they expect to be the beginning of a prolonged period of monetary easing.
The Federal Reserve's decision to cut rates by 50 basis points (0.5%)—its first cut since March 2020—sparked an initial market dip. However, investors soon turned bullish, pushing the markets higher by the end of the week. This significant rate cut, bigger than anticipated, was seen as a way to support continued economic growth despite mixed economic signals. Retail sales grew by 0.1% in August, slightly beating expectations, while a decrease in weekly jobless claims indicated a resilient labor market. Additionally, the housing sector showed signs of recovery, with building permits rising by nearly 5%. However, home sales fell unexpectedly, and Fed Chairman Jerome Powell emphasized that the central bank has limited influence on housing prices, particularly in addressing supply constraints.
In the bond market, the 10-year U.S. Treasury yield climbed modestly following the Fed’s decision. Meanwhile, corporate bonds saw strong demand, especially in the investment-grade segment, supported by positive market sentiment post-Fed meeting. Overall, the week’s developments indicate that the U.S. economy remains resilient, and the Fed’s policy shift aims to support growth amidst ongoing uncertainties.
In Europe, markets experienced mixed results. While the pan-European STOXX Europe 600 Index declined by 0.33%, national indexes in major economies like Italy and France posted modest gains, reflecting cautious optimism. Germany's DAX Index saw only a slight increase, while the UK's FTSE 100 fell by 0.52%, indicating varying economic outlooks across the region. The Bank of England (BoE) kept its key policy rate unchanged at 5.0%, a decision widely expected by markets. The BoE's cautious approach was driven by stable inflation data, which remained at 2.2% in August. However, service prices—a key indicator of wage-driven inflation—rose, leading the bank to issue forward guidance on maintaining policy restraint to avoid cutting rates too quickly. Bank of England Governor Andrew Bailey reiterated the importance of keeping inflation low and warned that interest rate cuts could only come when there is clear evidence of reduced inflationary pressures.
Elsewhere in Europe, the European Central Bank (ECB) also maintained its gradual approach to easing monetary policy. While some ECB policymakers expressed concerns over persistent inflation, they indicated that any rate cuts should be carefully timed. Labor costs in the eurozone grew more slowly than in previous months, providing some relief for policymakers. In Norway, the central bank, Norges Bank, also left rates unchanged at 4.5%, signaling stability in the region's monetary policy. Overall, the European markets remain in a cautious stance, balancing inflation concerns with hopes for future economic recovery.
Japan's stock markets posted solid gains for the week, driven by a weakening yen and the U.S. Federal Reserve’s rate cut. The Nikkei 225 rose by 3.1%, while the broader TOPIX Index increased by 2.8%. The yen's depreciation against the U.S. dollar, partly due to the Fed’s decision, provided a tailwind for Japanese exporters. Meanwhile, the Bank of Japan (BoJ) held its interest rates steady, as expected, with Governor Kazuo Ueda emphasizing a data-dependent approach to future policy changes. Japan’s economy showed resilience, with inflation expectations ticking up moderately. Domestic data, such as the 2.8% rise in core consumer prices in August, supported the BoJ’s outlook that the economy remains on track. The central bank’s cautious stance reflects broader uncertainties in global financial markets but underscores Japan’s steady economic performance.
In China, equities also advanced despite weak economic data. The Shanghai Composite Index rose by 1.21%, while the CSI 300 gained 1.32%. A holiday-shortened week combined with the Fed’s rate cut helped lift investor sentiment. However, China’s August economic indicators showed clear signs of a slowdown. Industrial production grew by 4.5%, lagging behind forecasts, while retail sales expanded by only 2.1%—both figures pointing to weakening consumer demand and economic momentum. China’s property sector remains in deep distress, with property investment declining further, and urban unemployment inching higher. These challenges have raised concerns about Beijing’s ability to meet its 5% growth target for the year. Analysts anticipate further economic stimulus measures from China’s government in the coming months, likely to offset the economic headwinds facing the country.
In summary, markets globally are grappling with mixed signals from central banks and economic data. While the U.S. has embraced a more accommodative monetary policy, Europe remains cautious, and Japan and China navigate their respective economic challenges. Investors continue to watch central bank decisions closely as these will shape future market trends and broader economic outcomes.
