Market Update Monday 19th September 2022

Global equity markets end down for the fourth week in five

A sharp pullback on Tuesday sent the major U.S. stock indices to their steepest weekly declines since June. The market fell for the fourth time in five weeks, with the NASDAQ and S&P 500 dropping 5.5% and 4.7%, respectively. Communication services and information technology shares were hit hardest as Alphabet and Meta Platforms hit new 52-week lows.

Core inflation not done yet

The main event of the week was Tuesday’s consumer price index report, which came in above expectations and softened investors hopes that the economy had moved beyond peak inflation. Headline prices rose 8.3% for the 12 months ended in August versus consensus expectations for an increase of around 8.1%. Of greater concern was that core inflation jumped to 6.3%, its highest level since March and above expectations for a rise of 6.1%. A 0.7% housing cost increase in August was partly to blame, but rising food and medical care prices also contributed heavily. Core producer prices, reported Wednesday, offered a somewhat more hopeful story, continuing a year-on-year decline that began in April, falling to 7.3% in August from 7.6% in July.

The week brought mixed messages on wage inflation, which has been a primary concern of policymakers. Weekly jobless claims, reported Thursday, showed a continuation of labour market strength, falling to 213,000, their lowest level since early summer. Media reports suggested a slightly different picture, highlighting that Goldman Sachs will soon cut jobs, joining a list of large companies, including Ford Motor and Microsoft, planning layoffs.

Recession fears hit the British pound

Shares in Europe pulled back amid signs of a deepening economic slowdown, with the European STOXX Europe 600 Index ended 2.89% lower. Japan’s stock markets fell over the week, with the Nikkei 225 Index dropping 2.29% and in China stock markets fell as currency weakness and downbeat property data overshadowed surprisingly strong factory output and retail sales indicators, the Shanghai Composite Index down 4.2%.

The British pound depreciated against the U.S. dollar, sinking to levels last hit in 1985. Fears of a looming recession contributed to this downward pressure, as did concerns that the Bank of England’s rate policy will continue at a slower pace than that of the US equivalent. Inflation in the UK came in at 9.9% in August. This reading marked a decline from the 10.1% registered in July. Falling fuel prices drove this slowdown. However, core inflation, which excludes food and energy costs, quickened to 6.3% from 6.2%.. The FTSE 100 finished the week -1.56%, aided somewhat by the benefit its many exporting constituents get from a weaker home currency.
The yield of the 10-year U.S. Treasury bond climbed for the seventh week in a row, reaching around 3.45% on Friday. The yield is up from 3.32% at the end of the previous week and from 2.64% at the end of July. The yield curve remained inverted, as the 2-year Treasury yield rose to about 3.87% on Friday—its highest level since 2007. British 10-year government bond yields also increased, to their highest levels in more than a decade, closing at 3.14%.

All eyes on rate announcements

Ahead of next week rate announcements from the US Federal Reserve and Bank of England, investors will be looking for any sign as to where to next for Central Banks. With a 75 basis point hike by the US Federal Reserve very much priced in to current market prices, any indication of a continued aggressive approach into the year-end could unsettle markets further. On the flipside of this, any signs of a slowdown or pause in the current pace of rate hikes, may be met with a sigh of relief and air of calm by markets.