After a dramatic selloff in global markets at the beginning of the month, driven by fears surrounding the U.S. economy, markets have largely stabilized. Major U.S. indexes have reclaimed their lost ground and recorded their best two-week performance of the year. The Nasdaq surged by 8.13%, while the S&P 500 rose by 7.8% from its prior slump.
The initial catalyst for the selloff occurred during the first two days of August, following a survey of manufacturing companies and official labour market figures. These updates intensified concerns that the U.S. economy might be entering a recession, with the Federal Reserve perceived as slow to cut interest rates. The selloff spiralled out of control as Asian markets reacted to the negative news regarding the U.S. economy, compounded by worries about the rising interest rates in Japan and a strengthening yen.
In July 2024, Core Consumer Price Inflation in the U.S. eased to an over three-year low of 3.2%, aligning with market expectations. While the U.S. economy has shown slight deceleration this month, other global regions are exhibiting surprising resilience despite sustained high borrowing costs, according to recent business surveys. The S&P Global Flash U.S. Composite PMI, which measures activity across the manufacturing and services sectors, decreased slightly to 54.1 in August from 54.3 in July. Meanwhile, Q2 GDP figures indicated an annualized growth rate of 3%, a significant increase from 1.4% in Q1 and surpassing the anticipated 2% growth.
Europe’s economy recorded a minor uptick in activity coinciding with the Olympic Games in Paris, and similar surveys from Australia and Japan suggested an acceleration in growth. In India, the economic survey indicated rapid ongoing growth. Eurozone GDP growth held steady at 0.3% for Q2 2024, unchanged from the previous period.
The European Stoxx 600 yielded a return of 2.8% for the month, bouncing back nearly 8% from its six-month lows in August. The European Central Bank (ECB) is widely expected to lower borrowing costs to 3.5% at its upcoming meeting on September 12, following a reduction in inflation from double digits in late 2022 to 2.6% in July. However, the ECB does not anticipate price growth to stabilize at its target until late next year. In Germany, national inflation figures unexpectedly dropped to 1.9% from 2.3% in the previous month. Spain reported a core inflation rate of 2.2% for August 2024, further increasing pressure on the ECB to reduce rates next month.
The UK’s FTSE 100 saw an overall increase of 1.5% this month, with economic output rising at its fastest pace since April. Indications of strength in the labour market and renewed business optimism for the coming months marked a boost for the newly elected Labour government, which has prioritised economic growth. The economy expanded by 0.9% year-on-year in Q2, compared to 0.3% in Q1, aligning with market forecasts. Private sector activity in the UK grew faster than expected in August, reaching its highest level in four months.
This growth is likely to instil caution among policymakers at the Bank of England as they consider the timing for a follow-up to their August 1 rate cut. At a gathering of prominent central bankers in the U.S., Fed Chair Jay Powell stated that the “time has come” for U.S. rate cuts. In contrast, Andrew Bailey, Governor of the Bank of England, cautioned that it was “too early to declare victory over inflation” in Britain. Fortunately for the BoE, core inflation in the UK fell to 3.3% in July, marking its lowest level since September 2021, including within the services sector. The Sterling reached $1.3263 on August 27, its highest value against the U.S. dollar since March 2022, as investors prepare for the U.S. Federal Reserve to begin rate reductions sooner than the UK’s central bank. Markets have factored in a total of 100 basis points of cuts in the U.S. interest rate by the year’s end.
Japan’s Nikkei 225 saw a gain of 1.4% for the month, rebounding over 22% from recent selloffs. The Bank of Japan surprised markets with a rate hike to 0.25% from 0-0.1% at its last meeting on July 31, triggering a global unwinding of carry trades that had thrived for nearly a decade due to ultra-low Japanese yen rates. Many investors have leveraged Japan’s low rates to borrow cheaply in yen and invest in higher-yielding overseas assets, predominantly in U.S. blue-chip companies—the so-called “yen carry trade.”
The core inflation rate in Japan peaked at 2.7% in July, accelerating for the third consecutive month and sustaining market expectations for potential further interest rate increases. The central bank also announced plans to reduce its monthly bond purchases to JPY 3 trillion from the current pace of around JPY 6 trillion, targeting a more normalised monetary policy. These changes form part of the central bank’s strategy to trim its nearly USD 5 trillion balance sheet and gradually withdraw from the bond market.
In China, the Shanghai Composite Index (SSE) dropped by 3%, while the Hang Seng Index increased by 4%. The world’s most populous nation is approaching deflation and grappling with a prolonged property crisis, burgeoning debt, and weak consumer and business sentiment. The Core Inflation Rate in China rose to 0.30% in July from -0.10% in the prior month. Weaker-than-expected second-quarter growth compelled China’s central bank to execute unexpected interest rate cuts last month to 2.3%, raising the prospect of a downgrade in the IMF’s growth forecasts for the country. This slowdown could adversely affect metal and food exports while relieving inflationary pressures through cheaper imports.
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