European inflation approaches central bank target
U.S. Stocks ended the week with mixed results during light pre-holiday trading. Major indexes showed varied performances as traders reduced activity ahead of the holiday weekend. The Nasdaq Composite, heavily weighted with technology stocks, saw the most significant decline, driven in part by NVIDIA's nearly 10% loss, which erased around USD 300 billion in value at its lowest point on Thursday. Value stocks outpaced growth stocks by the widest margin since late July. Markets were set to close the following Monday for Labor Day
Reassuring growth and inflation data As the earnings season neared its end, with NVIDIA's report being the notable exception, the economic calendar played a key role in shaping market sentiment. The Labor Department's core personal consumption expenditures (PCE) price index for July was a focal point, showing a 0.2% rise in prices. The year-over-year increase was slightly below expectations at 2.6%, reassuring investors about subdued inflation close to the Federal Reserve's target. Nasdaq futures surged following the data release. U.S. consumer resilience was highlighted by the Commerce Department's report of a 0.3% increase in personal incomes in July and a 0.5% rise in personal spending, which matched consensus estimates. The Commerce Department also revised the second quarter's annualized GDP growth from 2.8% to 3.0%, driven mainly by a significant upward revision in consumer spending
Affordability concerns weigh on potential homebuyers The housing sector remained a weak spot in the economy, with the National Association of Realtors reporting a 5.5% drop in pending home sales for July, the lowest since 2001. Affordability issues and uncertainty surrounding the upcoming U.S. presidential election, as well as expectations for lower mortgage rates due to potential Federal Reserve policy easing, were cited as contributing factors. The benchmark 10-year U.S. Treasury note's yield rose slightly during the week, as the likelihood of a 50 basis point rate cut at the Federal Reserve's mid-September meeting appeared to diminish. Futures markets continued to expect a 25 basis point cut
Despite the holiday approach, the tax-exempt municipal bond market saw active trading, driven by a busy primary calendar. Several large new deals attracted sufficient demand. Conversely, the investment-grade corporate bond market remained quiet, with only two new issues coming to market. The high yield market traded flat alongside equities, with below-average volumes and light activity. The issuance calendar was essentially on hold until after the holiday
Index data
The Dow Jones Industrial Average closed at 41,563.08, up by 388 points for a 10.28% year-to-date increase. The S&P 500 ended at 5,648.40, gaining 13.79 points with an 18.42% increase for the year. The Nasdaq Composite closed at 17,713.63, down 164.17 points but still up 18.00% year-to-date. The S&P MidCap 400 finished at 3,091.52, down 4.73 points, reflecting an 11.14% year-to-date gain. The Russell 2000 closed at 2,217.63, down 1.07 points with a 9.40% year-to-date increase
Europe The pan-European STOXX Europe 600 Index rose by 1.34% in local currency terms, hitting a record high as it continued a four-week rally. Slowing inflation strengthened the case for a potential European Central Bank rate cut in September. Germany's DAX reached a new peak, gaining 1.47%, while Italy's FTSE MIB added 2.15% and France's CAC 40 Index increased by 0.71%. The UK's FTSE 100 Index closed 0.59% higher
Eurozone inflation drops close to target, but caution remains among some policymakers Eurozone annual inflation slowed to 2.2% in August from 2.6% in July, the lowest in three years and just above the ECB's 2% target. The decline was partly due to higher energy costs a year earlier. Core inflation, excluding food and energy, decreased slightly to 2.8% from 2.9%. However, services inflation, closely monitored by policymakers, rose to 4.2% from 4.0%. Some ECB policymakers remained cautious about cutting rates soon. Dutch central bank governor Klaas Knot suggested that there could be room to gradually ease policy if inflation continues to decline, but emphasized the need for supportive data. Other policymakers, including Isabel Schnabel and Robert Holzmann, warned against lowering rates prematurely due to ongoing inflationary pressures
Eurozone economic sentiment rises, but German companies remain pessimistic The euro area's economic sentiment indicator rose to 96.6 in August from 96 in July, marking the highest reading in over a year. Confidence in the services sector improved, while consumer sentiment weakened. In contrast, Germany's Ifo business climate index fell more than expected to 86.6 in August, the lowest level since February, reflecting increased pessimism among companies. Ifo President Clemens Fuest noted that the German economy is sliding further into crisis
UK housing market strengthens The Bank of England reported an increase in net mortgage approvals in the UK, rising to 61,985 in July, the highest since September 2022. Net lending on mortgages grew to GBP 2.7 billion, the highest since November 2022. The Nationwide Building Society's house price index rose by an annual 2.4% in August, up from 2.1% in July
Japan Japan's stock markets rose over the week, with the Nikkei 225 Index gaining 0.7% and the TOPIX Index up 1.0%. By the end of August, both indexes had recovered most of the losses from earlier in the month. The 10-year Japanese government bond yield remained steady at around 0.9%. The yen weakened to the high end of the JPY 144 range against the USD. The yen's strength in August, driven by divergent monetary policy outlooks between Japan and the U.S., impacted the earnings prospects of Japan's export-oriented firms
Tokyo inflation rises more than expected Tokyo-area core consumer prices, a leading indicator of nationwide trends, rose by 2.4% year-on-year in August, surpassing expectations and marking the highest increase since March. Bank of Japan Governor Kazuo Ueda reiterated the central bank's intention to continue normalizing monetary policy, indicating readiness to hike rates again if economic projections materialize. Deputy Governor Ryozo Himino echoed Ueda's comments, stressing the importance of monitoring unstable financial markets closely
China Chinese stocks declined as several corporate earnings reports fell short of expectations. The Shanghai Composite Index dropped by 0.43% and the blue chip CSI 300 fell by 0.17%. In Hong Kong, the Hang Seng Index gained 2.14%
Economists lowered their 2024 growth forecasts for China, citing ongoing issues in the property sector and weak domestic demand. Retail sales growth estimates were revised down to 4% from 4.5% in July, while fixed asset investment growth expectations were cut to 4.2% from 4.4%. Consumer price index projections were also reduced to 0.5% from 0.6%. These revisions increased concerns that China might miss its 5% growth target for the year and led to speculation that the central bank might further loosen monetary policy
The People's Bank of China injected RMB 300 billion into the banking system through its medium-term lending facility, keeping the lending rate unchanged at 2.3%. It also added RMB 471 billion via short-term reverse repos, maintaining the lending rate at 1.7%
Other Key Markets
Hungary The National Bank of Hungary kept its main policy rate at 6.75% during its meeting on Tuesday. Policymakers acknowledged that Hungary's economic recovery had stalled in the second quarter due to a decline in industrial output. Inflation rose by 4.1% in July, driven by higher food and fuel prices. The central bank maintained that reducing inflation expectations and preserving financial stability remain priorities, though future rate cuts were not ruled out depending on global and domestic economic developments
Brazil Brazil's latest inflation reading showed a 0.19% month-over-month increase, slightly above expectations. Analysts noted that the composition of the inflation data was better than the headline figure, with most of the increase due to volatile airfares. Core inflation continued to decline in recent readings, though some inflationary pressure from exchange rates is expected to persist in core goods
Market Movers
Summer slows As summer draws to a close, market volumes have decreased, with Tuesday's session seeing some of the lowest volumes of the year. The S&P 500 fell 0.65% week-to-date, while the Nasdaq Composite declined 1.7% following AI-related news
All eyes on AI Analysts focused on a major semiconductor company's earnings announcement, one of the week's key events. Despite exceeding analysts' estimates, the company's underwhelming sales forecast and production issues led to a 6% drop in its shares. The tech-heavy Nasdaq 100 is down 1.4% week-to-date but up 15.4% year-to-date as markets balance AI expectations with reality
Record highs Germany's DAX index reached new all-time highs this week, driven by lower-than-expected consumer prices in August and optimism for future rate cuts. Despite these gains, potential economic challenges remain due to China's slowing economy and the slow recovery in Europe
Macro
Up for debate The upcoming presidential election debate between Kamala Harris and Donald Trump is a key focus, scheduled for September 10. Harris is gaining ground in swing states, leading prediction polls
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