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 experienced a rebound last week, recovering from the sharp losses of the previous week. The S&P 500, which had seen its worst decline since March 2023, regained ground, with growth stocks significantly outperforming value stocks. This resurgence was driven primarily by strong performance in the technology sector, with NVIDIA leading the charge. The company’s positive outlook on artificial intelligence at a major investment conference provided a boost in investor confidence. Traders noted a general uptick in market sentiment, spurred by a busy week of industry conferences.
However, economic data painted a more complex picture. Core inflation, excluding food and energy, came in slightly higher than expected, rising by 0.3% in August. This caused an initial dip in stock prices as inflation concerns mounted. Headline inflation, meanwhile, showed an annual increase of 2.5%, significantly lower than July’s 2.9%, marking the lowest level in over two years. Despite inflation fears, NVIDIA’s optimistic forecast helped reverse early market losses, allowing the broader stock market to recover.
In housing, some positive signs emerged as mortgage rates dipped to 6.29%, the lowest since February 2023. This was a welcome relief for potential homebuyers, as the Mortgage Bankers Association reported a rise in home loan applications, signaling some recovery in the housing market. Treasury yields fell to their lowest levels of the year, with the 10-year Treasury note hitting year-to-date lows. Municipal bond yields remained relatively stable, despite a wave of new issuances. In corporate bonds, new issuances were sparse, but investor optimism regarding potential Federal Reserve rate cuts helped high-yield bonds perform well.
European markets posted gains last week, with the pan-European STOXX 600 index rising 1.85%, following an interest rate cut by the European Central Bank (ECB). Major indexes across the region also saw gains: Germany’s DAX rose by 2.17%, France’s CAC 40 by 1.54%, and the UK’s FTSE 100 by 1.12%. The ECB’s decision to lower its deposit rate by 0.25% to 3.5% was largely anticipated, as it responded to signs of economic slowdown and cooling inflation in the eurozone. However, the central bank remained cautious, emphasizing that it was not committing to any particular future rate path. While the headline inflation forecast remained stable, core inflation expectations were slightly revised upward due to rising service costs.
Economists expect the ECB to proceed with a cautious approach, likely adjusting rates quarterly based on economic developments. Tight labor markets and rising wages, which have yet to slow below 4%, suggest continued inflationary pressures in the service sector. In the UK, economic growth remained stagnant for the second consecutive month in July, with manufacturing output contracting. However, the labor market showed some easing, as wage growth slowed slightly. Still, wage increases remain almost double the rate the Bank of England deems compatible with controlling inflation.
Outside of the U.S. and Europe, global markets exhibited mixed performance. In Japan, stock markets saw divergent outcomes, with the Nikkei 225 gaining 0.5%, while the broader TOPIX index fell by 1%. Japan’s currency, the yen, strengthened slightly against the U.S. dollar, complicating matters for the country’s export-driven economy. The Bank of Japan’s (BoJ) monetary policy remains a key focus, with expectations of further interest rate hikes, as policymakers aim to balance inflation risks and economic stability.
Japan’s second-quarter economic growth was revised downward, with GDP expanding by 2.9%, slightly below earlier estimates. Meanwhile, inflationary pressures eased, with the consumer price index rising by 2.5% in August, down from 3% in July. Despite the slight cooling in inflation, market watchers remain concerned about the strength of the yen and its impact on export costs. In China, stock markets faced headwinds as weak inflation data raised concerns about the country’s economic health. Both the Shanghai Composite Index and the CSI 300 fell by more than 2% as fears of a deflationary spiral grew. Core inflation remained subdued, rising by only 0.3%, the lowest level in over three years. Additionally, the producer price index fell, extending a trend of declining factory gate prices that began in late 2022. On the brighter side, Chinese exports outperformed expectations, rising by 8.7% in August, driven by demand in global markets. However, concerns linger over the long-term stability of China’s economy, especially as it grapples with a prolonged property crisis and the potential for slowing demand from international markets.
In summary, while U.S. stocks rebounded and European markets gained on the back of an ECB rate cut, global markets in Japan and China remain volatile, reflecting ongoing uncertainties in economic growth and inflation dynamics. Investors will be closely watching upcoming central bank decisions, particularly in the U.S. and Europe, as well as further developments in global inflation and trade.
