Summary
Global equities declined in August and US 10-year Treasury yields rose. Global economic activity continues to hold up better than expected. Equities still have upside in the near term if positive trends persist.
Market update
Equities: Global equities declined in August with the Asian markets underperforming their developed peers. Declines were led by Hong Kong equities and Korean equities, whilst the US market was a relative outperformer although still in negative territory in absolute terms. Weak Chinese macro data, combined with renewed stress in the country’s property market, weighed heavily on risk sentiment over the month. US equity sentiment has pulled back meaningfully, becoming less stretched.
Fixed Income : Investors digested the news that Fitch had downgraded the US government’s credit rating to AA+. Although the Fitch announcement had a muted impact on 10-year US Treasury yields, they rose by 12 bps to end the month at 4.09%, as the month progressed on strong US economic data. The prospect of a default by Country Garden further weighed on sentiment during the month along with the news that China’s Evergrande had filed for chapter 15 bankruptcy protection in New York.
Macro overview
Growth: Global economic activity is holding up better than expected despite a high interest rate environment and heightened geopolitical uncertainty, supported by the global consumer. The market has shifted towards a higher probability of a soft landing, but the upturn remains relatively weak. Financial conditions have eased, global supply chains have recovered, and direct concerns about the health of the banking sector have receded. However, with a slower-than-anticipated economic recovery in China and extreme weather events in North Asia, the balance of risks to growth remains to the downside.
Inflation: The recent August 2023 US job market report showed wage increases (i.e., average hourly earnings) slowing down, potentially suggesting that US inflation pressures are easing. A weakening labor market will eventually weaken consumer spending and weigh further on aggregate demand. As such, disinflationary trends remain intact.
Monetary Policy: Weaker growth, softer aggregate demand and disinflationary trends in the prices of goods will likely lead to less hawkish outcomes in monetary policy. The Fed seemingly has a balancing act between curbing inflation (at the potential cost of high unemployment) or preventing much higher unemployment (at the potential cost of inflation running higher). Futures markets are currently pricing in little possibility of rate hikes from the FOMC following a cooler US labour market in August.
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