USA
The main U.S. indices closed in positive territory. The NASDAQ increased by 5.95%, the S&P 500 rose by 4.02%, and the Dow Jones Industrial Average gained 2.60%. Last week, annual inflation continued to decline from 2.9% to 2.5%. However, core monthly inflation (excluding food and energy) rose for the second consecutive month, from 0.2% to 0.3%, raising concerns as it exceeded the Federal Reserve's target range. Initial jobless claims for the previous week came in at 230 000, slightly above the forecast of 227 000, signaling a stable but tight labor market. The total number of people receiving unemployment benefits increased marginally from 1.845 million to 1.850 million. The U.S. market experienced a mixed week, with strong economic data (e.g., retail sales and jobless claims) tempered by concerns over rising inflation and higher bond yields. Investors are weighing optimism about the economy’s strength against worries that persistent inflation could prompt the Federal Reserve to keep interest rates elevated for longer. As a result, volatility is expected to continue in the short term, especially as more economic data and potential Fed decisions come into focus. Market participants have been closely monitoring signals from the Federal Reserve. The likelihood of a rate cut at the upcoming meeting on September 17-18 has decreased from 50% to 20%, though there remains a broader expectation for rate reductions throughout the year. Treasury yields fluctuated, with the 10-year yield dropping to 3.63% early in the week but recovering to 3.65% by the week's end.
Europe
Last week, the indices closed in the green zone. The STOXX Europe 600 Index finished 1.85% higher. Among the major continental indices, France's CAC 40 gained 1.54%, and Spain’s IBEX 35 increased by 3.29%. The UK’s FTSE 100 Index rose by 1.12%, while Germany's DAX closed 2.17% higher. Eurozone factories experienced a fourth consecutive month of declining output in July, with production falling 0.3% compared to June, as industrial weakness continues, especially in Germany. Despite an upward revision to June's figures, eurozone factory output has not grown since March. Germany, the largest eurozone economy, saw a 3% decline in production, while other major economies like France, Spain, Italy, and the Netherlands also struggled. This industrial slump coincides with the European Central Bank's (ECB) decision to cut interest rates for the second time in three months, lowering the key rate to 3.5%. The ECB aims to stimulate investment and demand but remains cautious about inflation. ECB President Christine Lagarde emphasized a data-driven approach to further rate cuts, acknowledging the uncertainty surrounding the economic outlook. The ECB slightly downgraded its growth forecasts for the eurozone, expecting growth of 0.8% this year and 1.3% next year, while projecting higher underlying inflation at 2.9% this year and 2.3% next year. The eurozone's economic recovery remains sluggish, with declining private domestic demand, weakened business investment, and a struggling housing market. Lagarde warned that these challenges, combined with high inflation and declining industrial output, continue to threaten the region's economic outlook.
Japan
Japan has a relatively quiet week ahead. The Nikkei 225 index ended the week 0.52% higher, while the broader Topix index saw a drop of 1.01%. Japan's economy and its central bank, the Bank of Japan (BOJ), are in the spotlight as they play a crucial role in global financial markets due to the ongoing "yen carry trade" unwinding. This trade, where investors borrow yen at low interest rates to invest in higher-yielding assets elsewhere, has faced disruption as the BOJ raised interest rates from near zero. Although Japan's rates remain significantly lower than the U.S., the shrinking gap between the two is causing volatility.
While the U.S. Federal Reserve is expected to cut rates, the BOJ’s decision on September 20 is crucial. If the BOJ raises rates again, it could make the yen more attractive, leading to further unwinding of the carry trade. This would reduce liquidity in global markets, potentially causing asset sell-offs and increased volatility, particularly in high-yielding currencies like the Mexican peso and Brazilian real.
Investors are advised to brace for higher volatility and consider strategies to benefit from market swings, such as using volatility index-linked products. Although the BOJ and Fed are attempting to manage expectations, the situation could still lead to unpredictable market movements.
China
The Shanghai Composite Index edged down by 2.23%. In Hong Kong, the benchmark Hang Seng Index decreased by 0.43%. China’s economy is facing significant challenges, with August data revealing broad-based weakness, particularly in the property sector, which saw the steepest decline in home prices in nine years. Industrial production, retail sales, and investment have slowed, while inflation remains near zero, and consumer confidence has dropped. Although Beijing has implemented piecemeal measures, such as cuts to bank reserve requirements and initiatives to buy unsold homes, these efforts have not yet provided enough stimulus to boost growth.
China's leaders are focusing on long-term goals, such as strengthening advanced manufacturing and reducing reliance on Western technologies, at the expense of immediate economic rebalancing. Economists are concerned that without stronger stimulus targeting consumer spending, China risks slipping into a period of prolonged low growth and deflation, similar to Japan’s stagnation in previous decades.
The property market continues to be a significant drag, with $18 trillion in lost wealth estimated due to declining home prices. Despite efforts to boost factory output and exports, China's trading partners are implementing measures to curb the influx of Chinese goods, further complicating recovery efforts. Economists emphasize that more aggressive stimulus and steps to restore consumer confidence are essential to avoid deflationary pressures and reignite growth.