USA

The main U.S. indices closed in negative territory last week, with the NASDAQ declining by 5.77%, the S&P 500 dropping by 4.25%, and the Dow Jones Industrial Average falling by 2.93%. The market experienced a sharp sell-off, reminiscent of the early August decline, despite the absence of clear triggers. Concerns about a potential U.S. recession and its impact on corporate earnings, particularly in the tech sector, dominated market sentiment. Mixed economic data further contributed to the negative outlook. The U.S. PMI figures were disappointing, with the Markit PMI declining and the ISM PMI showing slight improvement, though both fell short of expectations.

Nvidia came under scrutiny after receiving a subpoena from the U.S. Department of Justice as part of an antitrust investigation. Additionally, speculation that September is traditionally a weak month for investments added to the bearish sentiment.

The U.S. job openings report (JOLTS) showed a decline, reinforcing the belief that the Federal Reserve may soon implement monetary easing. Meanwhile, the Fed's Beige Book indicated economic stabilization, and the Bank of Canada cut its interest rate for the third time.

The U.S. August jobs report came in slightly below expectations, with 142,000 new jobs added and downward revisions for previous months. However, the unemployment rate dropped to 4.2%, and wages rose more than anticipated. Despite these mixed results, the market now expects a cautious 25-basis-point rate cut at the Fed’s September meeting, rather than a more aggressive 50-basis-point cut.

Overall, market sentiment remains cautious, with additional data on inflation and jobless claims expected before the Fed's decision.

Europe

Last week, the indices closed in the red zone. The STOXX Europe 600 Index finished 3.52% lower. Among the major continental indices, France's CAC 40 lost 3.65%, and Spain’s IBEX 35 declined by 2.01%. The UK’s FTSE 100 Index decreased by 2.33%, while Germany's DAX closed 3.20% lower.

The European Central Bank (ECB) carried out a much-anticipated quarter-point rate cut in June, despite inflation and economic growth forecasts rising at that time.

The Bank of England (BOE) has taken a different approach compared to other major central banks. Despite achieving its 2% inflation target in May, it delayed its first rate cut until August, when inflation increased again. With the BOE's upward revision of growth forecasts, it suggests the bank may be cautious about making further cuts.

Two important takeaways are: first, interest-rate cuts tend to take time to have an effect, just as it took time for higher rates to bring down inflation. Second, stock markets often react more strongly to the anticipation of rate cuts than to the cuts themselves. While indices like the STOXX Euro 600 and Canada’s market index have reached new highs recently, others, such as the S&P 500 and FTSE 100, are still below previous peaks.

In the end, it’s less about when inflation reaches the target and more about expectations that it will. The full impact of rate cuts typically takes time to manifest after they are implemented.

Japan

Japan has a relatively quiet week ahead. The Nikkei 225 index ended the week 0.70% lower, while the broader Topix index saw a more significant drop of 4.37%. Revised data showed that Japan's economy grew by 2.9% on an annualized basis in the April-June quarter, slightly below the initial estimate but supported by a recovery in household and business spending. Consumer spending and capital expenditures were both revised slightly lower, though analysts believe this will not change Japan's monetary policy direction.

Naomi Muguruma, a strategist at Mitsubishi UFJ Morgan Stanley Securities, suggested the Bank of Japan could raise interest rates by 25 basis points as soon as December, after reviewing upcoming economic data. Bank of Japan Governor Kazuo Ueda has also indicated that further rate hikes may be considered if economic improvements continue.

China

The Shanghai Composite Index edged down by 2.69%. In Hong Kong, the benchmark Hang Seng Index decreased by 3.03%. China's consumer inflation rose in August due to supply disruptions from abnormal weather, though concerns about weak demand and economic challenges remain. The consumer price index (CPI) increased by 0.6% compared to the previous year, falling short of expectations but slightly above July's 0.5% rise. Food prices, particularly for vegetables, spiked due to agricultural disruptions caused by extreme heat and heavy rainfall.

Despite the increase in food prices, core inflation (excluding food and energy) eased to 0.3%. Economists predict that downward pressure on prices will persist as domestic demand continues to struggle amid a property downturn. Additionally, factory-gate prices dropped 1.8%, marking the 23rd straight month of decline, fueling concerns over deflation.

With weak consumer spending and reduced business investment, economists are urging stronger fiscal stimulus to combat deflationary risks. Former People’s Bank of China Governor Yi Gang stressed the importance of addressing deflation, warning that falling prices could negatively impact economic growth, corporate profits, and employment. Despite previous monetary easing, lending to the real economy has decreased, raising fears of a liquidity trap similar to Japan’s experience in the 1990s.

Economists believe fiscal policy should take a leading role in stimulating growth and raising inflation to restore consumer confidence and encourage spending.