Weekly market recap

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Central bankers at the Fed surprised the markets a bit on Wednesday when they cut interest rates by 0.5% for the first time in four and a half years. While this scenario was expected by a large group of analysts just before the announcement, it is still unusual for a central bank to start a monetary easing cycle with such a significant move after a long delay. It has only happened twice in the last 40 years, and that was when the economy was heading into recession (the dot-com bubble and the financial crisis).
The main reason for this move, according to Fed chief Jerome Powell, was that inflation was approaching the 2% target, and that inflation and the labour market were coming into balance. According to Powell, since the last Fed meeting, there have been two important monthly reports from the labour market that showed it cooling. According to Powell, the labour market is still in solid shape and the Fed wants to keep it that way, hence the decision to act preemptively with a 50 point cut.
Annual inflation in the US climbed to 9.1% in June 2022, the highest in more than 40 years. In response to rising inflation, the Fed had already begun tightening monetary policy in March 2022, and its benchmark rate has risen by more than five percentage points since then. According to the latest data, year-on-year inflation in the United States was 2.5% in August, down four-tenths of a percentage point from the previous month, further edging closer to the Fed's 2% target.
As for the labour market, in the last five months the US economy outside agriculture has created an average of just under 135,000 jobs. In contrast, the unemployment rate has risen this year, climbing from 3.7% in January to 4.3% by July, before falling by a tenth of a percentage point to 4.2% in August.
Unsurprisingly, Powell said, the next rate move will depend on incoming data, but in any case, markets expect a cut of at least another 0.5% at the next two meetings this year.

Indices

US equities reacted positively to the Fed’s surprisingly significant rate cut and have again recorded new all-time highs in the past week. While the markets’ initial reaction to the Fed’s move was not as expected and the index ended Wednesday in negative territory, something similar has happened in the past. As a result, optimism did not arrive until Thursday morning and most stocks, especially small caps, added significantly by the end.

European stocks also reacted positively to the rate hike by the US central bank. Thursday’s mixed data from the UK, and especially the sharp drop in consumer confidence, eventually led to more significant declines, which even caused UK stocks to end the week in negative territory. The pan-European STOXX Europe 600 ended 0.33% lower, France’s CAC 40 Index added 0.47%, Germany’s DAX rose 0.11% and the UK’s FTSE 100 Index lost 0.52%.

US30

+1.62%

US100

+1.42%

US500

+1.36%

GER30

0.11%

Commodities

After the August consolidation, gold continues to rise and break new records for the second week in a row. On Friday, thanks to the US rate cut, it already broke through the $2,600 per troy ounce mark. Within the current investment environment, metals such as gold have their advantages. They act as a significant anti-inflationary and store of value asset, aided by the current geopolitical uncertainty (the war in Ukraine and the conflict in the Middle East), as well as developments ahead of the US election. Given the course of the US election campaign so far, it can be assumed that the elections may bring a high degree of uncertainty to the financial markets, which will continue to drive the gold price upwards. This is certainly the best news for gold. It may continue to gain in price despite short breaks.

Gold

+1.67%

Silver

+1.51%

BRENT

+4.02%

NATGAS

+5.60%

Forex

Although the US Dollar remains on the defensive after the Fed’s aggressive rate cut, it managed to strengthen against at least the Japanese Yen over the weekend after two weeks of declines. Although the Japanese currency broke below the 140 yen per dollar level against the US dollar for the first time since last July on Monday, it ended up posting a significant decline against all majors currencies over the past week.

Bank of Japan Governor Kazuo Ueda acknowledged “some weakness” in the economy during the week, a slightly more dovish tone than previous statements. However, Ueda also assured that the economy was still on course for a modest recovery, and that the central bank would thus continue to adjust its easing rate, in line with economic and price forecasts, he said. The BOJ’s hawkish outlook is also supported by inflation data, with Japan’s core inflation rate accelerating to 2.8% in August from 2.7% in July.

EUR/USD

+0.80%

USD/JPY

+2.12%

GBP/USD

+1.52%

USD/CAD

-0.11%

Macro

US retail sales rose by 0.1% month-on-month in August, against expectations of a 0.2% decline, and were revised up by one tenth to 1.1% for July. Core retail sales recorded the same growth, but were expected to rise by 0.2%. US household consumption remains solid and provides a good basis for continued GDP growth in Q3.

New weekly US jobless claims through 09/14 were just 219K (forecast +230K), the lowest since May this year. According to the American Realtor Association’s NAR statistics, US existing home sales fell 2.5% month-over-month in August to a seasonally adjusted 3.86 million units. The indicator is below the 4 million home mark for the third month in a row.

According to preliminary data, the number of building permits issued in the United States in August rose by 4.9% month-on-month to an annualised rate of 1.475 million (estimate 1.41 million, previous -3.3% to 1.406 million). Housing starts rose 9.6% month-over-month to a full-year annualised pace of 1.356 million units (estimate1.31 million, previous -6.9% to 1.237 million units).

As expected, the Bank of England (BoE) left interest rates unchanged at 5.00% on Thursday, following the BoE’s first rate cut of 25 basis points in early August. BoE Governor Andrew Bailey said the central bank will continue to cut rates, but it will be a gradual and cautious process. The BoE wants to return inflation to permanently low levels, so it does not want to cut rates too hastily.

The UK CPI recorded an annual increase of 2.2% in August, repeating the result from July. The core component, excluding the impact of volatile energy, food, alcohol and tobacco prices, was 3.6%, up from 3.3% in July. The main driver of the rise in inflation this time was air fares. On the other hand, the biggest downward pressure came from petrol and prices in hotels and restaurants.

Eurostat confirmed its flash estimate from late last month that annual consumer price growth in the euro area slowed to 2.2% in August from 2.6% in July. Inflation in the euro area thus remains above the European Central Bank’s (ECB) 2 percent target. A year ago, the inflation rate in the euro area was 5.2 per cent. On a month-on-month basis, prices rose by 0.1 per cent, against an estimate of 0.2 per cent.

Germany’s ZEW economic institute said on Tuesday that its confidence index fell to 3.6 points from 19.2 points in August. The results are much worse than analysts’ estimates, who had expected the index to fall to 17 points. The optimism in economic expectations seen since November 2023 has almost completely disappeared, and the assessment of the current situation is the worst since May 2020.

What to watch out for this week

Monday will belong to the preliminary September purchasing managers' indices from S&P Global, both in the EU and UK, as well as in the US.
On Tuesday night, the Australian central bank will discuss monetary policy settings, while in the afternoon investors in the US will focus on the Conference Board's consumer confidence index, and the Richmond Fed's industrial activity index.
On Wednesday, only the statistics on new residential property sales and the final figure on building permits in the US will be of interest.
On Thursday, the German economic confidence index from GfK will arrive first, and then the US data will come into play. Namely, it will be the Chicago Fed's economic activity index, durable goods orders, the regular weekly unemployment claims report, the final second quarter GDP report, the pending residential sales statistics or the Kansas Fed's industrial activity index.
On Friday, we will see important numbers in the US regarding the PCE Price Index, which is considered the most important indicator of inflation when policymakers decide on interest rates.

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