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Wall Street ended lower, with losses accelerating later in the week. This was fuelled by mounting concerns about the health of the US economy with the ISM manufacturing Purchasing Managers’ Index (PMI) contracting to an eight-month low of 46.8 in July with a slump in new orders. Friday’s closely watched jobs report further stoked recession fears, with non-farm payrolls increasing by 114,000 last month, missing expectations, while the unemployment rate ticked up to 4.3%, its highest level in nearly three years. For the week the S&P 500 declined 2.1%, its worst week since April, while the tech-heavy Nasdaq index dropped 3.4%, entering correction territory having fallen over 10% from its July closing high. Small caps, which had seen a rally in July, also suffered and saw a sharp pullback, with the Russell 2000 index down 6.7%.

Aside from recession concerns, earnings reports were another area of focus for the week, with Amazon, Apple, Meta and Microsoft all reporting. A common thread across all the tech giants listed was the large amount of artificial intelligence spending, totalling $106bn overall for the first six months of 2024. Finally, there was the Federal Reserve meeting which concluded on Wednesday with no changes made as expected. The central bank however, did signal that it was poised for a September rate cut, which gave stocks a mid-week boost. After Friday’s job report, market expectations moved towards a 50 basis points rate cut in September. Treasury yields dropped on the rate expectations, with the 10-year Treasury yield dropping as low as 3.79% and seeing its worst week since March 2020.

US growth worries carried across to European market performance, with the pan-European STOXX 600 down 2.9% for the week and regional indices also lower. Tech stocks were particularly weak on Friday, following the global sell-off and also pressured by underwhelming earnings from Intel which weighed on semiconductor stocks. Markets also had to contend with an unexpected uptick in eurozone inflation in July, coming in at 2.6% year-on-year while the unemployment rate also slightly rose to 6.5% in June. The UK FTSE 100 fell 1.3% and gilt yields dropped in response to the Bank of England cutting its key interest rate by 25 basis points to 5%.

Japanese equity markets were amongst the biggest losers of the week, with the Nikkei 225 falling 4.7%. Friday’s session saw the index lose 5.8% in its largest daily decline since March 2020. Stocks were hurt by the disappointing data as well as the continued rebound in the yen, weighing on exporters. Earlier in the week the Bank of Japan lifted its interest rate, an unexpected move for many, and announced a reduction in its bond purchases which had been expected. Chinese equities managed to fare better for the week, with the Shanghai Composite up 0.5% while the Hang Seng saw a modest loss of 0.5%, proving more resilient to the sell-off. This came despite gauges of manufacturing activity cooling, with the Caixin PMI unexpectedly contracting for the first time in nine months

Weekly macro highlights

Federal Reserve remains on hold in July

The Federal Reserve (Fed) remained on hold at its meeting on 31 July, with the federal funds target range unchanged at 5.25-5.50%. The accompanying statement reiterated the message that inflation has eased but remains elevated, and the unemployment rate has moved up but remains low. Core personal consumption expenditure (PCE) inflation, the Fed’s preferred measure of inflation, rose 2.6% year-on-year in June, while the unemployment rate rose to 4.1%. In his post-meeting press conference, Chair Powell noted that the risks to achieving the dual mandate goals of maximum employment and 2% inflation have moved into better balance. The US Employment Situation Summary for July was released by the Bureau of Labor Statistics two days after the Fed meeting and highlighted this point. Non-farm payroll employment rose by 114,000 persons in July, below the 179,000 increase in June and market expectations of 175,000. Additionally, the unemployment rate rose to 4.3%, its highest level since October 2021.

Bank of Japan raises rates in July

The Bank of Japan (BoJ) Policy Board raised its policy interest rate by 15 basis points at its meeting on 31 July. The Bank will now “encourage the uncollaterised overnight call rate to remain at around 0.25%”, having previously encouraged it to remain “around 0-0.1%”. In addition, the BoJ detailed a plan to reduce its monthly purchases of Japanese government bonds (JGBs) by around JPY 400 billion each calendar quarter until Q1 2026. This will see BoJ JGB purchases decline from around JPY 5.7 trillion per month in July 2024 to around JPY 2.9 trillion per month in Q1 2026. The continued normalisation of monetary policy in Japan reflects economic developments broadly in line with the BoJ’s outlook for activity and prices presented in April. In addition, the Policy Board believes the balance of risks to inflation has shifted to the upside due to import price inflation returning to positive territory.

Bank of England cuts rates in August

The Bank of England (BoE) Monetary Policy Committee (MPC) voted by a majority of 5-4 to reduce the Bank Rate by 25 basis points to 5% at its meeting on 1 August. Year-on-year consumer price index (CPI) inflation was at the MPC’s 2% target in both May and June, though the BoE noted that this was primarily due to favourable base effects. The Bank expects inflation to rise to around 2.75% in the second half of 2024 as these base effects drop out of the inflation calculation and reveal “more clearly the prevailing persistence of domestic inflationary pressures”. With inflation expected to rise again in the coming months, the MPC emphasised that July’s move was about slightly reducing the degree of policy restrictiveness, but that “Monetary Policy will need to continue to remain restrictive for sufficiently long until the risks to inflation returning sustainably to the 2% target in the medium term have dissipated further”.