Overview
Central banks are committed to monetary tightening as inflation remains well above target. The Federal Reserve Chair, Jerome Powell in his speech on 25th August indicated possibility of further tightening to address inflation on a sustained basis. Further rate hikes are quite possible if economies continue to show resistance and inflation does not come down as per expectations. Even if central banks do not raise rates further, keeping them at current levels will have its economic consequences. Many analysts view eventual trickle-down effect of high interest rates on the economy, consumers, and corporate earnings has yet to come. Global equity markets remained negative in August amid fears of economic slowdown and possible recession. Worries over China’s troubled property market also added to the investors’ pessimism.
Looking at the performance of major asset classes, Shanghai Index was the worst performing asset in August with negative 5.2% return amid rising worries over slowing growth and faltering property market. Europe’s Stoxx 600 and Japan’s Nikkei 225 declined by 2.8% and 2.56%, respectively. Among other equity markets, DJ Islamic market index, UK’s FTSE 100 index, and US broader equity market benchmark S&P were down from 2% to 1.5% range. On the other hand, DJ Commodity Index ended the month almost flat while Crude oil soared 2.26% amid supply concerns. Lastly, both Gold and DJ Sukuk Index dropped by 0.25%.
Market Snapshot
News & Key Events in August
UK
• Consumer price inflation in the UK dropped to 6.8% in July 2023 from 7.9% in June, pointing to the lowest level since February 2022, mainly due to a slump in fuel prices.
• The Bank of England raised its policy interest rate by 25 basis points to 5.25% during its August 2023 meeting, marking a 14th consecutive increase, and bringing borrowing costs to fresh 2008-highs, as the central bank continues to battle high inflation.
• The British economy expanded 0.2% on quarter in Q2 2023, following a 0.1% growth in Q1.
US
• Annual inflation rate in the US accelerated to 3.2% in July 2023 from 3% in June, but below forecasts of 3.3%. It marks a halt in the 12 consecutive months of declines, due to base effects.
• Federal Reserve Chair Jerome Powell, speaking at the Jackson Hole Symposium on 25th August 2023, emphasised the potential necessity for the US Federal Reserve to implement additional interest rate hikes in order to effectively manage inflation.
• The US economy grew at an annualised rate of 2.1% in the second quarter of 2023, compared the first quarter’s expansion of 2%.
• On the employment front, the US economy added 187,000 jobs in August 2023, compared to 157,000 in July. Still, it was the third consecutive month with job gains falling below the 200,000 threshold, indicating a gradual easing of labour market conditions, largely attributed to the Federal Reserve’s significant interest rate hikes aimed at cooling down inflation.
Europe
• The annual inflation rate in the Euro Area remained steady at 5.3% in August 2023, more than 2-1/2 times above the ECB goal.
• European Central Bank policymakers maintained the possibility of a September rate hike when they raised interest rates in July, but certain members appeared to suggest that such a move might no longer be necessary once new projections are disclosed, the minutes from the most recent ECB meeting showed.
• The Eurozone economy grew by 0.3% in the second quarter of 2023 after a flat first quarter. The recovery in demand was likely bolstered by a moderation in inflationary pressures.
China
• As the rest of the economies struggle with high inflation, China may in fact be moving towards deflation. This could prompt consumers and businesses to delay investment and spending decisions, making it tougher to revive economic growth. China’s consumer prices dropped by 0.3%% yoy in July, the first decrease since February 2021, compared to a flat reading in June.
• The People’s Bank of China (PBoC) slashed its 1-year loan prime rate (LPR) by 10bps to a record low of 3.45% while unexpectedly holding steady the 5-year rate, a reference for mortgages, at 4.2%.
• The Chinese economy grew by a seasonally adjusted 0.8% in the second quarter of 2023, but slowing sharply from the 2.2% expansion observed in the previous quarter.
• As the result of cost-cutting efforts by companies, office vacancies are rising in China’s most prime office buildings as businesses look to reduce rental expenses during falling economic activity. This probably would make things worse in China amid growing worries about the property sector having driven global banks to cut their forecasts for growth in the world’s second largest economy.
Others
• The annual inflation rate in Japan was unchanged at 3.3% in July 2023 but was notably higher than market forecasts of 2.5%.
• The annual inflation rate in Russia rose to 4.3% in July 2023 from 3.3% in June, the highest in five months. The Central Bank of Russia raised its key interest rate by 350bps to 12% on August 15, 2023, the highest level since April 2022 and said inflationary pressure is building up.
• The annual inflation rate in Canada rose to 3.3% in July 2023 from 2.8% in the previous month and above market expectations of 3%.
Disclaimer
Data as of 31 August 2023. This article is for information only. Please do not act based on anything you might read in this article. Past performance is not a reliable indicator of current or future returns. This article contains general information only and does not consider individual objectives, taxation position or financial needs. Nor does this constitute a recommendation of the suitability of any investment strategy for a particular investor. It is not an offer to buy or sell or a solicitation of an offer to buy or sell any security or instrument or to participate in any trading strategy to any person in any jurisdiction in which such an offer or solicitation is not authorised or to any person to whom it would be unlawful to market such an offer or solicitation.
When you access a shared link of third-party websites, you are leaving our website and assume total responsibility and risk for your use of the third-party websites. We make no representation as to the completeness or accuracy of information provided at these websites nor do we endorse the content and information contained on those sites.