Shaw and Partners

Following the previous week’s equity market sell-off, stocks bounced back with inflation and central banks in focus. The S&P 500 had experienced its worst weekly drop since March 2023, owing to economic growth concerns and potentially the September effect taking hold, however, it managed to see a weekly gain of 4% as investors tried to claw back losses. Tech stocks, which were amongst the most beaten up in the sell-off, saw some of the strongest performances, particularly Nvidia. Indeed, the tech-heavy Nasdaq was up almost 6% on the week.

The core consumer price index (CPI) rose 0.3% month-on-month (MoM) in August, slightly higher than expected, and the producer price index (PPI) also rose more than expected on a MoM basis. The inflation data seemed to back the case for the Federal Reserve to only cut interest rates by 25bps when it meets this week. On Wednesday, the CME FedWatch tool was pricing in just a 14% chance of a 50bps cut, however, on Friday, this had jumped to 47%, helping to support stock market gains, particularly the more rate sensitive small caps. The change in rate cut expectations came after former New York Fed President Bill Dudley said that there was a strong case for a 50bps cut. Treasury yields edged lower over the week, with the 10-year yield settling at 3.66%.

While the Fed’s next move is currently too close to call, one central bank decision that was widely expected was the European Central Bank cutting its deposit rate by 25bps to 3.5% on Thursday. Somewhat disappointing to markets though was that few clues were given on what to expect from future rate decisions. Nevertheless, European equity markets logged weekly gains, bouncing back from previous losses. For the week, the pan-European STOXX 600 added 1.9%, with regional indices also higher.

Equity performance in Japan was not as strong, with the Nikkei 225 only gaining 0.5% for the week while the Topix fell 1%, hurt by a strengthening yen against the dollar owing to the US inflation data. Thursday did see a brief pause in the yen’s ascent, allowing the Nikkei to snap a seven-session losing streak. In China the Shanghai Composite posted a weekly decline of 2.2% and Hong Kong’s Hang Seng fell 0.4%. Economic data was mixed, with China’s CPI rising less than expected in August and factory gate prices once again remaining in deflationary territory, while there was a slight boost in sentiment as exports rose by 8.7% year-on-year, which was higher than expected.

Weekly macro highlights

US CPI inflation eases in August

US consumer price index (CPI) inflation rose 0.2% MoM in August according to data published by the Bureau of Labor Statistics. The data was in line with market expectations, unchanged from July’s print, and contributed to a 2.5% year-on-year (YoY) rise in the CPI. Food prices rose 0.1% on the month, reflecting no change in food at home prices and a 0.3% rise in prices of food away from home. Energy prices fell 0.8% MoM in August, with declines of 0.6% and 0.9% respectively for energy commodity prices and energy services prices. Excluding food and energy prices, core CPI inflation rose 0.3% MoM in August, above market expectations for a repeat of July’s 0.2% increase. This contributed to a core CPI inflation reading of 3.2% YoY, unchanged from July’s print. Shelter prices made the largest upward contribution to both the headline and core indices, rising 0.5% MoM in August.

ECB cuts rates in September

The European Central Bank (ECB) Governing Council cut the deposit facility rate by 25 basis points to 3.5% at its meeting on 12 September. In her post-meeting press conference, President Lagarde noted the decision was based on the Governing Council’s updated assessment of the inflation outlook and underlying inflation dynamics. Recent inflation data in the eurozone has come in broadly in line with ECB staff expectations and the outlook for headline inflation was unchanged relative to the June projections. As such, headline inflation is still expected to average 2.5%, 2.2% and 1.9% in 2024, 2025 and 2026 respectively. While President Lagarde noted domestic inflation remains high due to wages rising at an elevated pace, she also highlighted that wage pressures are dissipating, and company profits are limiting the pass-through of higher wages to inflation. The statement accompanying the decision highlighted that the ECB will continue to follow a data-dependent approach to future monetary policy decision.

UK GDP flat in July

UK gross domestic product (GDP) was unchanged in month-on-month (MoM) terms in July, according to a preliminary estimate published by the Office for National Statistics. The data was below market expectations for a 0.2% MoM increase in GDP and marked the second consecutive month of no growth. Services output grew by 0.1% MoM in July, rebounding from a 0.1% contraction in June, with the largest positive contribution coming from information and communication services. This was offset by 0.8% and 0.4% MoM declines in output for production and construction respectively. The 0.8% MoM decline in production output followed 0.8% growth in June, with the largest contribution to July’s decrease being a 1.0% MoM decline in manufacturing output. The 0.4% MoM decline in construction output in July followed an increase of 0.5% in June, with both new work and repair and maintenance down over the month. In 3-month-on-3-month terms, GDP rose 0.5% in July.