Money Matters 21 September 2023

Stocks mixed as US inflation accelerates

Stock markets were mixed last week as an uptick in US inflation raised concerns that the Federal Reserve may be further away from its 2% target than initially thought.

In the US, the S&P 500, Dow and Nasdaq fell 0.8%, 0.1% and 1.5%, respectively. Technology stocks lagged after Apple’s new iPhone 15 received mixed reviews.

In Europe, the Stoxx 600 added 1.3% after the European Central Bank (ECB) hiked interest rates but raised hopes that it could be nearing the end of its monetary tightening campaign. The FTSE 100 surged 2.9% as the pound depreciated against the dollar. A weaker pound helps to support the index because around 70% of FTSE 100 company revenues come from overseas.

In China, the Shanghai Composite ended the week down 0.8% as investors weighed ongoing weakness in the property market against signs of stabilisation in the broader economy.

Last week’s market update*

• FTSE 100: +2.86%
• S&P 500: -0.83%
• Dow: -0.13%
• Nasdaq: -1.51%
• Dax: +0.59%
• Hang Seng: +0.48%
• Shanghai Composite: -0.80%
• Nikkei 225: +3.28%
• Stoxx 600: +1.25%
• MSCI EM ex Asia: +0.51%

* Data from close of business Friday 8 September to close of business Friday 15 September

Investors await key interest rate decisions

Stock markets were mixed on Monday (18 September) ahead of this week’s key interest rate decisions. The impact of rising oil prices on inflation data also weighed on investor sentiment. The FTSE 100 retreated from a four-month high to finish the day down 0.8% at 7,653. The pan-European Stoxx 600 declined 1.1%, while Wall Street indices managed fractional gains.

The Federal Reserve is expected to keep interest rates on hold when it meets this week. However, stronger-than-expected economic data has led to heightened uncertainty about the future path of interest rates. The BoE is expected to hike rates by another 0.25 percentage points to 5.5%. This week will also see policy decisions from central banks in Japan, Brazil and Turkey.

US inflation rate rises to 3.7%

Last week saw the release of the closely watched US consumer price index (CPI) report, which showed inflation rose by more than expected in August, largely because of higher energy prices. The annual rate of inflation edged up to 3.7% from 3.2% in July.

US headline CPI – YoY % change

On a monthly basis, prices rose by 0.6% in August, the biggest monthly gain of 2023 so far. Energy prices rose by 5.6% month-on-month, including a 10.6% surge in gasoline prices. Even when volatile energy and food prices were stripped out, ‘core’ CPI rose by 0.3% month-on-month, up from 0.2% in July. This marked the first acceleration in core inflation for six months.

ECB lifts key deposit rate to 4.0%

In Europe, the ECB defied calls for a pause in interest rate hikes, and instead chose to lift its key deposit rate to a record high of 4.0%. There had been speculation that the central bank would keep rates on hold amid signs of a weakening eurozone economy. However, the ECB said inflation was still expected to remain too high for too long, and it was “determined to ensure that inflation returns to its 2% medium-term target”.

The ECB also said rates had reached levels that would “make a substantial contribution to the timely return of inflation to the target”. Commentators interpreted this to mean that the ECB had made its final hike of the current cycle, with some suggesting that rates could be cut in the first half of next year. However, ECB president Christine Lagarde responded by saying: “We have not decided, discussed or even pronounced cuts.”

UK economy shrinks more than expected

Here in the UK, data from the Office for National Statistics (ONS) showed gross domestic product (GDP) contracted by 0.5% in July, which was worse than analysts had predicted. Industrial action by NHS workers reduced health service activity, while extremely wet weather weighed on retailers and the construction sector. For the first time since summer last year, all three major sectors – manufacturing, services and construction – contracted. Nevertheless, Darren Morgan, ONS director of economic statistics, said the broader picture looked positive, with growth in all three major sectors over the past three months.

Chinese retail sales pick up pace

Last week saw some signs of a stabilising Chinese economy, with both retail sales and industrial production growing by more than expected in August. According to the National Bureau of Statistics, retail sales grew by 4.6% year-on-year, up from 2.5% in July and much higher than forecasts of 3.0%. Industrial production also grew by a better-than-expected 4.5% year-on-year, up from 3.7% in July.

On the flipside, fixed asset investment, the historic driving force of China’s growth, missed forecasts, expanding by just 3.2% year-on-year, down from 3.4% in July. This was driven by a deepening slump in real estate investment in China.


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