Global Market Analysis By zForex

Commercial Content Analysts
1

Mixed Performance in Asia-Pacific Markets, Hong Kong Stocks Lead Losses, RBA Maintains Interest Rates, and China Evergrande Group Reports Steep Losses

The Asia-Pacific markets experienced a mixed performance, with Hong Kong stocks leading the region’s losses, plummeting by 2%. This decline was primarily influenced by the real estate and technology sectors. Meanwhile, the Nikkei 225 saw a marginal increase, and the Topix rose by 0.32%. Japanese investors are preparing for significant economic data to be released later this week, including trade balance and consumer price index figures for June.

The meeting minutes reveal that the Reserve Bank of Australia (RBA) recently deliberated on whether to maintain or raise interest rates by 25 basis points during its July meeting. Ultimately, the central bank decided to keep the existing rates, citing the current monetary policy as already restrictive due to the prevailing cash rate of 4.1%. The RBA acknowledged the historically high level of mortgage interest payments in May and recognized a decline in inflation, which was expected to help mitigate the risk of medium-term inflation expectations rising. Furthermore, the RBA expressed concerns that increasing rates could lead to a more significant-than-expected slowdown in output growth, highlighting the substantial uncertainty surrounding household consumption.

China Evergrande Group, a Chinese property developer, reported substantial losses in its long-delayed results for 2021 and 2022. The company recorded a total net loss of 686.2 billion yuan ($95.68 billion) in 2021 and a 125.8 billion yuan total net loss in 202

On Wednesday, the U.K. inflation figures will be released as the Bank of England prepares for its upcoming monetary policy meeting on August 1. Following strong wage growth in the three months leading up to May, there remains a possibility of a consecutive 50 basis point hike.

Additionally, U.S. retail sales data is set to be released, and a strong performance indicated by the numbers could lead to a reassessment of whether the Federal Reserve has almost concluded its interest rate hikes.

2

Chinese Property Stocks Tumble on Debt Fears, Japan’s Business Activity Holds Steady, Australia’s Private Sector Contracts

On Monday, Chinese property stocks experienced a significant decline, with Country Garden’s shares leading the way by reaching their lowest point in over eight months. This was triggered by renewed concerns about the debt situation of Chinese real estate developers. In response, China is implementing a series of measures to bolster its economy, especially ahead of a crucial Politburo meeting scheduled for this week, which will assess the country’s economic performance for the first half of the year.

In the past week, the authorities made several pledges aimed at specific sectors and intended to reassure private and foreign investors about a more favorable investment environment. However, many of these measures were broad and lacked specific details.

Meanwhile, Japan’s business activity showed growth for the seventh consecutive month, according to preliminary estimates by au Jibun Bank. The country’s composite purchasing managers index (PMI) remained at 52.1 for July, unchanged from the previous month. However, the services PMI slightly decreased from 54 in June to 53.9, while manufacturing activity continued to contract, with the PMI declining from 49.8 to 49.4.

In Australia, private sector business activity declined for the first time since March, mainly due to a contraction in the services sector. Juno Bank’s flash estimates showed a drop in the composite purchasing managers index to 48.3 from 50.1 in June. The services PMI fell below the no-change mark of 50, reaching 48, compared to 50.1 in June. On the other hand, manufacturing activity saw a milder contraction at 49.6, improving from 48.2 in June.

It’s important to note that a PMI reading above 50 signifies an expansion in the sector, while a reading below 50 indicates a contraction.

Additionally, the HCOB Germany Composite PMI declined to 48.3 in July 2023 from June’s 50.6, falling below the forecast of 50.3, as indicated by preliminary estimates. This suggests the first contraction in private sector activity so far this year and the most significant downturn since November. The decline was attributed to manufacturing production falling at the fastest rate since May 2020, mainly due to the rapidly declining demand for goods. Lastly, Spanish equities underperformed following an inconclusive outcome in the recent election held on Sunday, which generated uncertainty and weighed on investor sentiment.

3

Hong Kong Stocks Rebound on China’s Pledge, European Markets Cautious Amid Economic Data and Earnings

On Tuesday, Hong Kong stocks experienced a strong rebound, with the Hang Seng index surging over 3%. This surge was triggered by China’s Politburo, which pledged to promptly “adjust and optimize policies” to address issues in its struggling property sector. Additionally, Beijing’s top decision-making body promised to prioritize stable employment as a strategic goal and introduced other measures to stimulate consumption and tackle debt risks. This commitment came after disappointing economic data surfaced last week, prompting renewed calls for policy support to bolster growth.

Meanwhile, European markets are expected to open cautiously on Tuesday as investors carefully evaluate economic data and corporate earnings from the region. There will be a keen focus on various economic reports, such as the German business climate and British business optimism index data. Notably, companies like LVMH, Unilever, Deutsche Borse, Randstad, and Italgas are slated to report their earnings on the same day.

Recent data indicated a slowdown in business activity in France, Germany, and the U.K. during July, adding to recessionary concerns across Europe. Additionally, investors will be keeping an eye on the Eurozone bank lending survey on Tuesday, which can offer insights into borrowing trends ahead of anticipated rate hikes by both the Federal Reserve and the European Central Bank.

The week remains busy for global investors, with a series of corporate earnings announcements and central bank meetings in focus. The European Central Bank is scheduled to meet on Thursday, where policymakers are expected to announce a 25 basis point rate hike and provide guidance on their efforts to combat inflation in the final stages.

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  • Global Stocks Decline Ahead of Fed’s Rate Decision and Inflation Trends: Earnings Season Remains in Focus

Asian stocks declined, mirroring the drop in European equity futures, as investors adjusted their positions to mitigate risks in anticipation of the Federal Reserve’s upcoming rate decision.

During the second quarter, Australia’s consumer price index grew by 6% year on year, showing a decrease from the 7% recorded in the first quarter. This marks the second consecutive quarter of a slowdown in the inflation rate, following the 33-year high of 7.8% observed in the fourth quarter of 2022.

The Federal Reserve is anticipated to approve its 11th interest rate increase since March 2022. Markets have fully priced in a quarter percentage point hike, which would bring the benchmark borrowing rate to a target range of 5.25%-5.5%. If implemented, this would be the highest level for the upper boundary of the federal funds rate since January 2001. Investors will closely monitor signals from the Federal Open Market Committee, seeking indications that the members are confident enough in the fight against U.S. inflation to temporarily pause further rate hikes.

Consumer confidence in the US soared to a two-year high in July, reaching a reading of 117.0, attributed to a tight labor market and decreasing inflation. Nonetheless, the economy still faces uncertainties, with the Conference Board’s survey providing mixed signals.

International Monetary Fund’s (IMF) upward revision to the global growth forecasts joins the previously released downbeat data from top-tier economies, which in turn flagged concerns of a sooner end to the rate hike cycle.

The focus remains on earnings season, with results from companies such as Deutsche Bank, Stellantis, GSK, Carrefour, and luxury goods giant LVMH. In the United States, investors are digesting an earnings beat from Alphabet and a slowdown in cloud revenue growth from Microsoft, in anticipation of results from Coca-Cola, Boeing, AT&T, Meta, Chipotle, and Mattel.

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Asia-Pacific Markets Rise Amidst China’s Fourth Consecutive Month of Factory Contraction; Central Banks Adjust Policies in Response to Economic Challenge

On Monday, Asia-Pacific markets saw gains despite China’s factory activity remaining in contraction territory for the fourth consecutive month in July. The official manufacturing purchasing managers index (PMI) was 49.3, slightly higher than June’s figure of 49.0, according to the National Bureau of Statistics. Additionally, the PMI for non-manufacturing activity came in at 51.5, indicating a slower rate of expansion compared to June’s 53.2.

In Japan, the central bank made adjustments to its yield curve control. They allowed 10-year Japanese government bond yields to fluctuate within a range of approximately plus and minus 0.5 percentage points from its 0% target. Furthermore, the bank offered to purchase 10-year JGBs at 1% through fixed-rate operations, expanding its tolerance by 50 basis points. These measures were taken to address concerns about the prolonged impact of monetary easing on financial markets and the real economy. BOJ Governor Kazuo Ueda clarified that it is not a move towards policy normalization but rather a measure to enhance the sustainability of yield curve control. The bank also kept its ultra-loose interest rate at -0.1% and raised its median inflation forecast for fiscal 2023 to 2.5%.

Today, preliminary Eurozone inflation data will be released, and it is expected to show a further decline from June’s 5.5%. This may provide some relief for policymakers. The European Central Bank’s Christine Lagarde indicated last week that the bank was open-minded about the possibility of raising rates in September as inflation shows signs of easing.

The Bank of England is widely anticipated to raise interest rates by at least 25 basis points during its upcoming policy meeting on Thursday. This would mark the 14th consecutive increase, driven by the persistence of high U.K. inflation, which saw a slight drop to 7.9% in June.

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Asia-Pacific Markets Show Mixed Performance Amid China’s Factory Contraction, Unemployment Rate Declines in Japan, and UK Housing Market Struggles in July 2023

On Tuesday, the Asia-Pacific markets exhibited mixed performance, triggered by China’s factory activity entering contraction territory for the first time since April, as per the Caixin survey by S&P Global. The Purchasing Managers Index (PMI) for July registered at 49.2, falling short of economists’ expectations of 50.3, as revealed by Reuters polls. This comes after yesterday’s official statistics, indicating China’s factory activity contracted for the fourth consecutive month, with a PMI reading of 49.3.

Meanwhile, in Japan, the seasonally adjusted unemployment rate for June decreased to 2.5%, slightly below the previous month’s 2.6%, aligning with economists’ predictions based on government data. Additionally, Japan’s jobs to applicants ratio for June stood at 1.3, slightly lower than the Reuters forecast of 1.32.

Contrary to economists’ expectations from Reuters polls, the Reserve Bank of Australia decided to maintain rates at 4.1%, instead of implementing a 25 basis points hike.

In Europe, several companies, including Euroapi, Uniper, Daimler Truck, DHL Deutsche Post, Covestro, BP, HSBC, Travis Perkins, and Diageo, are expected to release their earnings reports. Additionally, Eurozone unemployment data will be published.

In the United Kingdom, the Nationwide House Price Index for July 2023 experienced a notable decline of 3.8% compared to the previous year, accelerating from the 3.5% decrease observed in June, marking the largest fall in house prices since July 2009. This decrease in housing prices is attributed to subdued housing market activity due to stretched housing affordability for prospective homebuyers with mortgages.

Throughout the day, PMI updates will continue, encompassing figures from the Eurozone, including Germany, as well as from the UK and the US.

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Central Banks’ Moves and Economic Indicators: Japan’s Policy Adjustment, New Zealand’s Rising Unemployment, and Fitch’s Rating Cut

The Bank of Japan has pushed back on speculation its recent policy adjustment marked the start of a tightening cycle.

Deputy Governor Shinichi Ichida on Wednesday reiterated the central bank’s flexible threshold for tolerance on long-term bond yields is merely a necessary modification to sustain its ultra-easy monetary policy position.

New Zealand’s unemployment rate increased to 3.6% in the second quarter, up from the 3.4% in the first quarter and higher than the 3.5% expected in a Reuters poll.

Most notably, job growth climbed 1% quarter on quarter, sharply higher than Reuters forecast of 0.5%.

Fitch Ratings cut the United States’ long-term foreign currency issuer default rating to AA+ from AAA on Tuesday, citing an erosion of governance and expected fiscal deterioration over the next three years.

In particular, the agency called out brinksmanship in Washington around debt ceiling negotiations earlier this year.

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Service Sector Growth in China, Bank of England’s Rate Hike Expectations, and Global Stock Market Performance

In July, China’s service sector activity showed a stronger expansion, as indicated by the Caixin survey compiled by S&P Global. The service sector purchasing managers index reached 54.1, slightly up from June’s 53.9. The survey report attributes this growth to a solid rise in business activity across the sector and a significant increase in overall new business, leading to six consecutive months of firms expanding their payroll numbers

In June, Australia’s trade surplus declined to 11.3 billion Australian dollars ($7.4 billion) from May’s AU$11.7 billion.

Private payrolls data showed that US companies added 324,000 workers last month, surpassing the consensus forecast of 190,000. In addition, investors reacted to news that the Treasury will issue $103 billion of securities next week, slightly more than forecast, and this comes shortly after Fitch Ratings’ downgrade of the US.

The Bank of England (BOE) is considering a 25-basis point hike after last month’s inflation rate showed some improvement, sitting at 7.9%, down from 8.7% in May. Despite the BOE’s divergent stance from other central banks, high inflation levels and mixed labor and wage data may cause market apprehension about any unexpected moves similar to the half-point curve ball thrown at their previous meeting.

9

Central Bank Actions and Economic Outlook: Updates from Australia, China, and the UK

Australia’s central bank has revised its growth outlook for 2023 to 1%, compared to the previous estimate of 1.25%. The Reserve Bank of Australia stated that economic activity in the country is expected to remain subdued due to cost-of-living pressures and rising interest rates affecting domestic demand. Despite this, the bank mentioned that inflation is improving and adjusted its inflation rate forecast to 4.25% from 4.5%. The bank anticipates a decline in inflation, reaching 3.75% by the end of 2024 and returning to the 2-3% target range by late 2025.

The People’s Bank of China announced increased monetary support for the economy and assistance for banks in controlling liability costs. This decision came after discussions with executives from the property industry.

The Bank of England raised its main interest rate by 25 basis points, bringing it to a 15-year high of 5.25%, as a response to persistent inflation.

Investors are closely watching the European banking results and a significant US employment report is expected later on Friday. Preliminary data already indicated resilient demand for workers in the US, with a significant increase in productivity, offsetting labor costs. The forthcoming government employment data is projected to show the addition of 200,000 jobs in July, which, though lower than previous reports, still represents historical progress.

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July Economic Outlook: Unemployment Shifts, Trade Fluctuations, and Policy Considerations

In July, Australia’s seasonally adjusted unemployment rate rose to 3.7%, up from June’s 3.5%, surpassing economists’ expectations of 3.6% from a Reuters poll. This unexpected increase sparked discussions about its potential economic impact.

Simultaneously, Australia’s employment-to-population ratio declined to 64.3%, while the participation rate dropped to 66.7%. These intertwined figures shed light on the nuances of the country’s job market.

It is worth noting that the Reserve Bank of Australia has emphasized the significance of the employment rate in its monetary policy decisions. This focus highlights the metric’s role in shaping Australia’s economic outlook. Consequently, shifts in unemployment rates could influence the central bank’s policy stance.

Turning attention to China, Premier Li Qiang’s reaffirmation of the nation’s commitment to meeting annual economic targets came on the heels of disappointing July economic data. The lackluster data raised concerns about China’s targeted GDP growth of around 5%. Li’s assurance of ongoing efforts reflects the government’s determination to navigate economic challenges.

Meanwhile, Japan experienced trade fluctuations. After a June surplus, the country slipped into a trade deficit in July, reporting a deficit of 78.7 billion yen, diverging from the 43 billion yen surplus the previous month. This prompted economists to reevaluate their projections and examine factors driving this volatility.

On a global scale, insights from the Federal Reserve’s July minutes highlighted “upside risks” to inflation. These insights signaled the potential for further rate hikes due to sustained inflation above the Committee’s target. The tight labor market reinforced these inflation concerns, providing a glimpse into the Federal Reserve’s considerations and their ramifications.

11

Chinese Stocks Surge, Evergrande’s Plunge, and Global Economic Signals

Mainland Chinese and Hong Kong stocks led the regional gains as Asia-Pacific markets began the final trading week of August on a positive note. To invigorate the capital market and enhance investor confidence, Chinese authorities reduced the stamp duty on stock trades, effective from Monday. While not a massive fiscal stimulus, this move was a welcome acknowledgment from Beijing of the need for assistance. As a result, stocks saw an increase of about 2.5%, marking the second-largest daily gain of the year and underscoring the market’s lackluster performance.

The shares of China Evergrande Group, the world’s most indebted property developer, tumbled by up to 87% upon its reopening on Monday, its first trade since March 21, 2022. Meanwhile, Australia reported a 0.5% rise in seasonally adjusted retail sales for July compared to June, surpassing economists’ expectations of a 0.3% increase according to Reuters polls.

Federal Reserve Chair Jerome Powell, speaking at his annual address in Jackson Hole, Wyoming, early on Friday, stated that central bank policymakers were attentive to signs suggesting that the economy might not be cooling as anticipated. This poses a dichotomy: while faster-than-expected economic growth benefits corporate earnings and leads to higher Treasury yields for valid reasons, the surge in yields places pressure on growth stocks, whose future earnings are evaluated against the risk-free Treasury rate, as well as on indebted companies that must refinance their obligations at elevated rates.

12

Asia’s Economic Reports, Central Bank Actions, and Gold’s Rise with the New Data

Shares in Asia experienced fluctuations as investors processed the latest economic reports from China. In August, consumer spending rebounded after a lackluster July, as indicated by the China Beige Book’s survey of Chinese businesses released on Thursday. The survey, conducted from August 17 to 25 with responses from 1,300 businesses (mostly non-state-owned), revealed these findings.

While China’s factory activity contracted for the fifth consecutive month, the official manufacturing purchasing managers index for August stood at 49.7. This contraction was milder than the anticipated 49.4 predicted by economists polled by Reuters, as well as the 49.3 reported in July. Simultaneously, the non-manufacturing PMI weakened for the fifth straight month, dropping to 51.0 from July’s 51.5. However, the composite PMI showed improvement, reaching 51.3, marking its first increase in four months.

These indications of China’s weakness were met with further signs of official support. The People’s Bank of China engaged with lenders and private businesses to enhance funding access. Additionally, two major Chinese cities lowered mortgage requirements for select homebuyers in response to central government guidance. This move sparked expectations of similar measures to counteract a notable housing slowdown.

In Japan, retail sales exceeded expectations in July, rising by 6.8% year-on-year. This growth is the highest recorded since the 8.2% surge in May 2021, excluding the 7.2% increase in March.

European markets are set to open higher on Thursday, buoyed by UBS’s robust performance after acquiring Credit Suisse. UBS reported a second-quarter profit of $28.88 billion, surpassing analysts’ projections of $12.8 billion polled by Reuters.

Turning to the US, the ADP private payrolls report revealed a slower-than-anticipated job growth in August. Private employers added 177,000 jobs during the month, a significant drop from the revised total of 371,000 jobs added in July.

US gross domestic product (GDP) exhibited a 2.1% annualized growth rate in the second quarter, lower than the government’s previous estimate. These less-than-stellar US economic indicators further supported predictions of the Federal Reserve scaling back on interest-rate hikes. Swap contracts currently reflect a probability of less than 50% for another quarter-point increase within the year.

13

Surprising Strength in U.S. Services Sector Points to Persistent Inflation Pressures

In August, the U.S. services sector unexpectedly strengthened, showing an increase in new orders and higher input costs, which could indicate lingering inflation pressures. The Institute for Supply Management (ISM) reported a non-manufacturing PMI of 54.5, the highest since February, up from 52.7 in July. A reading above 50 suggests growth in the services industry, a significant part of the economy. Economists had predicted a drop to 52.5, with none expecting a reading above 53.9.

Federal Reserve officials have raised interest rates by 5.25 percentage points over the past year and a half to combat high inflation. They’ve welcomed signs of higher borrowing costs impacting the economy. Inflation, measured by the personal consumption expenditures (PCE) price index, stood at 3.3% in July, down from a peak of 7% last summer.

Monthly job growth has averaged around 150,000 over the past three months, a decrease from 238,000 in the previous three months. The ISM also reported a 10th consecutive month of contraction in the manufacturing PMI for August. These indicators suggest the Fed might keep its policy rate steady in the upcoming meeting and potentially halt rate hikes.

Fed Governor Christopher Waller, known for his hawkish stance, expressed cautious optimism, emphasizing the importance of the services sector in taming inflation. The latest ISM report showed an increase in new orders (57.5 in August from 55.0 in July) and higher prices paid for inputs (58.9 in August from 56.8 in July), indicating a continued lack of evidence of a slowdown in inflationary pressures.

14

China’s Credit Trends, Central Banks, and Inflation Prospects

China has witnessed an improvement in credit demand and a reduction in deflationary pressures, suggesting positive signs for both its economy and financial markets. This development has boosted optimism in European stocks and US futures, as it hints at China’s economic stability and expectations that the US can manage inflation without harming growth.

In the midst of China’s economic challenges, Country Garden, the country’s largest private developer, faces a series of creditor votes, attempting to avoid default by extending debt repayments to onshore creditors over three years.

Meanwhile, the yen strengthened by over 1% against the US dollar after BOJ Governor Kazuo Ueda suggested that there might be enough information by year-end to assess wage growth, a crucial factor in determining the Bank of Japan’s monetary policy adjustments.

Although Europe had a slow start, the focus this week centers on monetary policy decisions. The ECB is set to announce its rates on Thursday, with expectations of a potential rate hike, driven by hawkish comments from officials and rising crude oil prices.

The Bank of England’s announcement is scheduled for September 21, following the Fed. BOE chief economist Huw Pill is addressing the situation today, paving the way for British jobs data on Tuesday and GDP figures on the following day.

Regarding the Federal Reserve, officials have conveyed a clear message lately – they are not eager to raise rates this month but remain cautious about inflation. Investors are eagerly awaiting key US inflation data, including the consumer price index on Wednesday and the producer price index on Thursday.

US Treasury Secretary Janet Yellen has expressed growing confidence that the US can manage inflation without causing significant harm to the job market.

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China has witnessed an improvement in credit demand and a reduction in deflationary pressures, suggesting positive signs for both its economy and financial markets. This development has boosted optimism in European stocks and US futures, as it hints at China’s economic stability and expectations that the US can manage inflation without harming growth.

In the midst of China’s economic challenges, Country Garden, the country’s largest private developer, faces a series of creditor votes, attempting to avoid default by extending debt repayments to onshore creditors over three years.

Meanwhile, the yen strengthened by over 1% against the US dollar after BOJ Governor Kazuo Ueda suggested that there might be enough information by year-end to assess wage growth, a crucial factor in determining the Bank of Japan’s monetary policy adjustments.

Although Europe had a slow start, the focus this week centers on monetary policy decisions. The ECB is set to announce its rates on Thursday, with expectations of a potential rate hike, driven by hawkish comments from officials and rising crude oil prices.

The Bank of England’s announcement is scheduled for September 21, following the Fed. BOE chief economist Huw Pill is addressing the situation today, paving the way for British jobs data on Tuesday and GDP figures on the following day.

Regarding the Federal Reserve, officials have conveyed a clear message lately – they are not eager to raise rates this month but remain cautious about inflation. Investors are eagerly awaiting key US inflation data, including the consumer price index on Wednesday and the producer price index on Thursday.

US Treasury Secretary Janet Yellen has expressed growing confidence that the US can manage inflation without causing significant harm to the job market.

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Asia’s Stock Fluctuations, European Optimism, and Key Economic Events Ahead

Stocks in Asia fluctuated and Chinese shares were back in the red. Gains triggered by news on Country Garden Holdings Co. — which secured payment extension approval from its bondholders — were not enough to keep the positive sentiment going for long.

European stock markets are poised to open higher on Tuesday, extending the positive momentum from the previous session. This comes as we enter a busy week for economic data.

Taiwan Semiconductor Manufacturing Corp saw a 1.6% increase in its shares following a deal between Apple and Qualcomm. Qualcomm will supply 5G chips to Apple until at least 2026.

TSMC is a manufacturer of both Qualcomm’s chips and Apple’s chips, which power its devices.

Bank of Japan boss Kazuo Ueda’s weekend comments that the end of stimulus is possible during 2023 is still reverberating in the local bond market, with the benchmark 10-year yield pushing to a new near-decade peak.

In the May to June period, the UK unemployment rate rose by 0.5 percentage points to 4.3%, in line with expectations.

The annual growth in employees’ average total pay, including bonuses, reached 8.5%, influenced by one-off payments in June and July 2023 from the NHS and Civil Service.

Notably, annual growth in pay, excluding bonuses, remained stable at 7.8%, marking a record high. Overnight, BOE uber-hawk Catherine Mann warned it’s too soon to stop raising rates.

Germany’s economic recovery is in the spotlight as well with the release of the ZEW survey, with sentiment likely weighed down by tighter monetary conditions.

The focus shifts to US inflation data, with the consumer price index figures scheduled for Wednesday and the producer price index for Thursday.

Additionally, China will release a plethora of data on Friday, encompassing house prices, industrial production, retail sales, and unemployment.

17

Global Markets Brace for US Inflation Data with Rising Oil Prices and Economic Indicators

Asian markets declined following a shaky performance on Wall Street as investors awaited crucial US inflation data, all while concerns grew over rising oil prices and their impact on ongoing inflationary pressures, complicating the outlook for interest rates.

In Japan, the corporate goods price index for August saw a 3.2% year-on-year increase, slightly lower than the revised figure of 3.4% in July. This index reflects the prices charged by Japanese companies when trading with each other. Moreover, corporate sentiment in Japan took a hit in September, with both large manufacturers and non-manufacturers showing diminished optimism.

Meanwhile, the UK experienced a 0.5% drop in gross domestic product in July, falling below the 0.2% contraction predicted by economists in a Reuters poll. The Office for National Statistics attributed this decline primarily to a 0.5% drop in services output. However, the economy outperformed expectations for the second quarter, with the ONS confirming 0.2% growth.

Market sentiment is shifting towards expectations of a quarter-point interest rate hike by the European Central Bank (ECB) due to ongoing concerns about high inflation in the region. Money markets now indicate a 70% probability of a rate increase, up significantly from just 20% earlier in the month. This change in outlook is driven by reports suggesting that the ECB’s forthcoming economic forecasts will project inflation exceeding 3% in 2024, reinforcing the case for further tightening.

Economists are estimating a 3.6% year-over-year increase in US inflation, according to Dow Jones. This would represent an uptick from the previous month’s reading of 3.2%. Additionally, the core consumer price index, which excludes food and energy costs, is expected to show a 4.3% rise in August, down slightly from the 4.7% gain observed in July.

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U.S. Inflation Surges, European Central Bank Decision Awaited, and Arm’s Debut on Wall Street.

Despite August’s US inflation being higher than expected at 3.7% (compared to the anticipated 3.6%), most Asia-Pacific markets experienced gains. Meanwhile, European markets opened with a mixed outlook, with investors eagerly anticipating the European Central Bank’s upcoming rate decision.

Shares of Arm, the British chip design company founded in 1990, will begin trading in New York on Thursday for the first time after being taken private by SoftBank in 2016. Shares of Japanese investment holding company Softbank slipped slightly on Thursday after subsidiary Arm priced its initial public offering at $51 per share.

In Australia, the unemployment rate remained stable at 3.7% in August, aligning with economist predictions. However, there is uncertainty surrounding the European Central Bank’s decision, with economists split on whether it will maintain rates or opt for a 10th consecutive hike, potentially reaching 4%. Market expectations lean towards the latter, although concerns about the economic decline in the Eurozone could sway more dovish ECB members.

Demand for Japanese 20-year bonds at auction was the strongest since May 2020, soothing concerns about a potential normalizing of monetary policy by the Bank of Japan.

The U.S. August inflation data surpassed expectations, largely due to surging oil prices, with the gasoline index being the primary contributor to the monthly rise in the consumer price index (CPI).

The Federal Reserve is unlikely to adjust interest rates at its upcoming meeting on September 20, as markets have already priced in a more than 95% probability of no change. However, the November meeting, being the year’s final one, might witness a rate increase if inflation remains elevated. Presently, the market anticipates a cautious stance from the Fed as it monitors inflation.

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ECB Hike Signals, China’s Economic Surge, and Arm Holdings’ Strong Debut

European markets were poised for a positive opening on Friday in response to the European Central Bank’s indication that their latest interest rate hike could be their last. Simultaneously, global stocks were experiencing a rally.

Meanwhile, oil prices surged to their highest point in 10 months, driven by robust August data on Chinese retail sales and industrial production. Chinese retail sales surpassed expectations by growing 4.6% compared to the previous year, exceeding the Reuters poll forecast of 3%. Similarly, industrial production in August increased by 4.5% year-on-year, surpassing the 3.9% forecast.

Furthermore, industrial production, which also rose by 4.5% in August from the previous year, exceeded both the 3.9% forecast and the 3.7% increase reported for July. The People’s Bank of China maintained the interest rate on its one-year medium-term lending facility and injected additional liquidity into the markets via a key policy loan for the 10th consecutive month, following a recent reduction in lenders’ reserve requirements.

The European Central Bank raised interest rates by 25 basis points, marking its 10th consecutive rate hike and pushing its main rate to a historic high of 4%. The bank revised its inflation forecasts slightly upward for the current year and the next, projecting rates of 5.6% and 3.2%, respectively. However, it lowered its 2025 inflation forecast from 2.2% to 2.1% and also adjusted its economic growth expectations for the Eurozone downwards.

Notably, a significant development emerged as ECB Governing Council members suggested they do not anticipate further rate hikes at this time, indicating a potential period of stable rates.

In other market news, Arm Holdings Plc had a strong trading debut in New York, with a 25% jump in its stock price. Conversely, Ford Motor Co. and General Motors Co. faced challenges as workers at Detroit carmakers-initiated strikes following the expiration of contract deadlines. Additionally, traders were preparing for the triple witching options event on Friday, which had the potential to cause volume spikes and increased market volatility.

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Market Volatility and Central Bank Decisions: A Weekly Overview

Asian-Pacific markets declined on Monday in anticipation of central bank decisions scheduled for the week. Meanwhile, European markets had a negative start to the week.

The troubled Chinese real estate developer Evergrande saw its shares plummet by as much as 22.6% on Monday following the detention of some staff from the group’s wealth management unit by the police over the weekend.

There are reports suggesting that the Japanese investment holding company SoftBank is planning to make significant investments, potentially reaching “tens of billions,” in the field of artificial intelligence.

Societe Generale SA’s stock dropped by more than 7%, significantly impacting Europe’s Stoxx 600 Index, as the lender’s strategic plan failed to meet investor expectations.

Oil prices continued to rise for the third consecutive day, with Brent crude approaching $95 per barrel due to OPEC+ supply cuts tightening the market. Investors are closely monitoring Saudi Energy Minister Prince Abdulaziz bin Salman’s address at an industry conference on Monday for insights into the global oil supply outlook.

The US Federal Reserve is set to announce its decision on Wednesday. While it is widely expected that the central bank will maintain interest rates, investors are keen to discern the Fed’s stance on inflation.

In other developments this week, Australia’s central bank will release the minutes of its September 5 policy meeting on Tuesday, and the Bank of Japan will conclude its monetary policy meeting on Friday. Additionally, the People’s Bank of China is expected to announce its loan prime rate decisions on Friday.

Last week in Europe, the European Central Bank raised interest rates by 25 basis points, marking the 10th consecutive hike and bringing its main rate to a record high of 4%.