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Stocks end mixed in light pre-holiday trading

The major indexes ended mixed in a week of light trading ahead of the holiday weekend—T. Rowe Price traders observed that fewer shares traded hands Monday than on any other trading day so far this year, excluding early closes. The technology-heavy Nasdaq Composite fared the worst, dragged lower in part by chip giant NVIDIA, which lost nearly 10% of its value, or roughly USD 300 billion, at the stock’s low point on Thursday. Relatedly, value stocks outperformed growth shares by the largest margin since late July. Markets were scheduled to be closed the following Monday in observance of the Labor Day holiday.

Reassuring growth and inflation data

With earnings season nearly over—NVIDIA’s report following the close Wednesday being the major exception—the week’s fairly busy economic calendar appeared to play a large role in driving sentiment for those traders still in the office. The most closely watched data point was probably the Labor Department’s release of its core personal consumption expenditures (PCE) price index on Friday morning. The Federal Reserve’s preferred inflation gauge showed prices rising by 0.2% in July, largely as expected, although the year-over-year increase came in a tick lower than consensus, at 2.6%. Investors seemed pleased with confirmation that inflation was remaining subdued and near the Fed’s target, with Nasdaq futures, in particular, surging in the wake of the release.

The week also brought some hopeful signs that the U.S. consumer was proving resilient in the face of the cooling labor market. The Commerce Department reported Friday that personal incomes had increased an unexpected 0.3% in July, up from June’s 0.2%. Personal spending rose even more, 0.5%, although the gain was in line with consensus. The Commerce Department also revised upward its estimate of the annualized growth in gross domestic product in the second quarter, from 2.8% to 3.0%. The increase was driven largely by a substantial upward revision in consumer spending over the quarter, from 2.3% to 2.9%.

Affordability concerns weigh on potential homebuyers

Continuing a recent pattern, the housing sector appeared to be the weak leg of the expansion. The National Association of Realtors reported Thursday that pending home sales had tumbled 5.5% in July, bringing them to their lowest level in records dating to 2001. The association’s chief economist attributed the drop to “affordability challenges and some degree of wait-and-see related to the upcoming U.S. presidential election,” as well some buyers expecting mortgage rates to drop as the Fed eases policy.

The yield on the benchmark 10-year U.S. Treasury note drifted higher over the week, as hopes appeared to dim that the Federal Reserve would cut interest rates by a full 50 basis points (0.50 percentage point) at its mid-September meeting. (Bond prices and yields move in opposite directions.) According the CME Fedwatch tool, futures markets continued to price in the certainty of a cut of least 25 basis points (0.25 percentage point).

Despite the coming holiday, it was an active week in the tax-exempt municipal bond market, thanks to a busy primary calendar. According to our traders, multiple large new deals reached the market and were met with adequate demand.

Conversely, the investment-grade corporate bond market was quiet leading up to the long weekend, with just two new issues coming to market. Similarly, the high yield market traded flat alongside equities, with volumes well below average and light activity throughout the week. No new deals were announced with the calendar essentially shut down until after the holiday.

In local currency terms, the pan-European STOXX Europe 600 Index gained 1.34%, rising to a record high. The benchmark extended a rally for a fourth week as sharply slower inflation supported the case for the European Central Bank (ECB) to cut interest rates in September. Among major European stock indexes, Germany’s DAX reached a fresh peak, climbing 1.47%, while Italy’s FTSE MIB added 2.15%, and France’s CAC 40 Index tacked on 0.71%. The UK’s FTSE 100 Index ended 0.59% higher.

Eurozone inflation drops close to target; some policymakers still cautious

Headline annual inflation in the eurozone decelerated to 2.2% in August from 2.6% in July—the lowest level in three years and a shade above the ECB’s 2% target. Higher energy costs a year ago were partly responsible for the decline. Core inflation, which excludes volatile food and energy costs, ticked down to 2.8% from 2.9%. However, services inflation—a data point that is closely watched by policymakers—quickened to 4.2% from 4.0%.

Some ECB policymakers remained cautious about lowering borrowing costs anytime soon. Dutch central bank governor Klaas Knot said there was scope to gradually ease policy if inflation continued to fall but emphasized that incoming data points would also need to be supportive for rates to be cut in September. Executive Board member Isabel Schnabel and Governing Council members Robert Holzmann and Joachim Nagel cautioned against lowering interest rates too early, highlighting the persistence of underlying inflation pressures.

Eurozone economic sentiment rises, but German companies downbeat

The economic sentiment indicator for the euro area rose to 96.6 in August from a revised 96 the month before. This latest monthly reading was the strongest in more than a year. Confidence improved in the services sector, but consumers were gloomier.

In contrast, the Ifo Institute’s business climate index for Germany dropped more than expected to 86.6 in August, the lowest level since February, as companies grew more pessimistic. Ifo President Clemens Fuest said: “The German economy is increasingly falling into crisis.”

UK housing market strengthens

The Bank of England said net mortgage approvals in the UK rose to 61,985 in July, the highest level since September 2022. Net lending on mortgages grew more than expected to GBP 2.7 billion, the highest since November 2022. Meanwhile, the Nationwide Building Society’s house price index rose an annual 2.4% in August, up from 2.1% in July.

Wrapping up a volatile month, Japan’s stock markets rose over the week, with the Nikkei 225 Index gaining 0.7% and the broader TOPIX Index up 1.0%. By the end of August, both indexes had recovered most of the ground lost in the steep sell-off around the start of the month, which followed the Bank of Japan’s (BoJ’s) late-July interest rate hike and was largely driven by renewed U.S. growth fears and the rapid unwinding of the yen carry trade.

In the fixed income markets, the yield on the 10-year Japanese government bond was broadly unchanged on the week at about 0.9%. In foreign exchange, the yen weakened to the high end of the JPY 144 against the USD range from JPY 144.35 at the end of the previous week. The Japanese currency strengthened for the second consecutive month in August on the divergent monetary policy outlooks for Japan and the U.S., weighing on the earnings prospects of Japan’s export-oriented firms.

Tokyo inflation rises more than expected

A hawkish outlook on the BoJ’s monetary policy was reinforced by the latest inflation data. The Tokyo-area core consumer price index (CPI), a leading indicator of nationwide trends, rose 2.4% year on year in August, versus consensus 2.2% and the highest since March. BoJ Governor Kazuo Ueda recently reiterated that the central bank would continue to normalize its monetary policy as it gains confidence in the economy achieving 2% inflation in a stable manner, indicating willingness to hike rates again if its projections for the economy and prices materialize.

In the latest communication from the BoJ, Deputy Governor Ryozo Himino echoed Ueda’s comments, adding that the baseline scenario for the future remains that growth and inflation will develop in line with the central bank’s outlook. Of course, this likelihood can be affected by financial markets at home and abroad, which remain unstable and must be watched with an extremely high sense of urgency.

Chinese stocks fell as a series of corporate earnings reports missed expectations and dampened buying sentiment. The Shanghai Composite Index lost 0.43% while the blue chip CSI 300 fell 0.17%. In Hong Kong, the benchmark Hang Seng Index gained 2.14%, according to FactSet.

Several China economists reduced their 2024 growth forecasts as the country grapples with a prolonged property sector slump and weak domestic demand. Retail sales, a key consumption indicator, are estimated to grow 4% this year, down from estimates of 4.5% in July, according to a Bloomberg survey of economists. Fixed asset investment is expected to grow 4.2%, lower than the prior month’s projection of 4.4%. Economists also trimmed their consumer price index forecast to 0.5% from 0.6%. The weaker outlook for China raised the prospect that the country may miss its official growth target of about 5% this year. It also raised expectations that the central bank may further loosen policy in the near term, including additional interest rate cuts and a reduction of the reserve requirement ratio for domestic lenders.

On the monetary policy front, the People’s Bank of China injected RMB 300 billion into the banking system via its medium-term lending facility and left the lending rate unchanged at 2.3%. The central bank also supplemented the banking system with RMB 471 billion via its short-term seven-day reverse repos and kept the lending rate at 1.7%.

Hungary

Central bank officials keep rates steady but do not rule out future cuts

On Tuesday, the National Bank of Hungary (NBH) held its regularly scheduled meeting and kept its main policy rate, the base rate, at 6.75%. The NBH also left the overnight collateralized lending rate—the upper limit of an interest rate “corridor” for the base rate—unchanged at 7.75%. In addition, the central bank held steady the overnight deposit rate, which is the lower limit of that corridor, at 5.75%.

According to the central bank’s post-meeting statement, policymakers acknowledged that the country’s economic recovery stalled in the second quarter, noting that “economic expansion was restrained by a decline in value added by industry, which constitutes a large share in the national economy.” Regarding inflation, policymakers observed that consumer prices in July “rose at a faster pace” than in June—by 4.1% in annual terms—and identified rising food and fuel prices as the reason for an inflation pickup. They continued to expect inflation to rise close to 5.0% “temporarily” by the end of 2024.

The Monetary Council concluded that “reducing inflation expectations further and preserving financial market stability remain key to achieving price stability again and restoring the sustainable growth path of the domestic economy.” As a result, and consistent with their “stability-oriented approach to monetary policy,” central bank officials decided to keep interest rates at current levels. However, policymakers did not rule out rate cuts in the future, noting that “there may be scope for cautiously lowering interest rates further in the coming period, depending on the expected interest rate policies of the world’s leading central banks, as well as developments in the domestic inflation outlook and changes in Hungary’s risk perception.”

Brazil

Latest inflation reading higher than expected

Earlier this week, the Brazilian government reported that month-over-month inflation was measured at 0.19%, which was slightly above expectations. According to T. Rowe Price analysts, the composition was better than the headline number, as most of the upside surprise was due to volatile airfares. Core inflation and core services inflation have moved down again in most recent readings, though there is probably still some foreign exchange passthrough of inflation in the pipeline for core goods.

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