Global equity markets ended last week down for the third week in a row. In particular, markets were hit by news late on Friday that Russia’s Gazprom would be keeping the Russia-to-Europe Nord Stream 1 gas pipeline closed with no timeline for reopening. This followed a more constructive US August jobs report earlier on Friday prior to Gazprom’s announcement.
On Friday, Jerome Powell told investors at Jackson Hole that the Fed is committed to raising rates and fighting inflation until it “gets the job done.” This past week, financial markets took that message seriously. We saw equity markets fall and bond yields rise somewhat, even after a resilient jobs report on Friday. Friday’s August jobs report from the Department of Labour showed that the economy added 315,000 jobs last month, a number seen as solid though down from a revised 526,000 in July. The unemployment rate rose to 3.7% from 3.5% in July as the labour force participation rate increased. Nonetheless, markets are still forecasting a 75 basis-point (0.75%) rate hike at the September Fed meeting and a terminal fed funds rate of close to 4.0%, with expectations of Fed rate cuts removed from mid-2023 forecasts.
US equities were down 3.3% over the week, whilst US technology stocks fell 4.2%. European markets dropped 3.06% and UK stocks were down 2.85%. Japan’s stock markets fell over the week, with the Nikkei 225 Index down 3.46% while the broader TOPIX Index declined 2.50%. Alongside this, the Japanese currency breached the JPY 140 level against the U.S. dollar for the first time since 1998. China’s stock markets fell as coronavirus outbreaks in major cities triggered renewed lockdowns and dampened the economic outlook. The Shanghai Composite Index retreated 1.54% and the blue-chip CSI 300 Index, slipped 2.01%.
The evidence of continued tightness in the labour market helped push U.S. Treasury yields higher, with the two-year Treasury yield reaching levels not seen since late 2007, closing the week at 3.40% whilst the US 10 year reached 3.2%.
Whilst markets may have trouble “fighting the Fed” in the near term, we could see calmer waters in the months ahead. There are two key drivers of a potential U-shaped recovery in markets as we head towards year-end. With the US mid-term elections taking place on November 8th, the period after mid-term elections tends to be positive for markets, regardless of which party wins. Alongside this, should inflation continue to moderate the Fed may pause on rate hikes after its December meeting, which would be a welcome sign of easing financial conditions for investors.
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