The prospect of an imminent ending of the ECB’s restrictive monetary policy led to firmer equity markets in Europe last week. Macroeconomic data out of China was also reassuring.

In fixed income, the US 10-year yield edged above 4.3% while the German Bund remained northwards of 2.65%.

In the US, the consumer price index rose by 3.7% year-on-year in August, gaining by 0.5 points relative to July. The main reason for this inflation was the recent surge in oil prices. Excluding energy and food, the 12-month inflation rate was 4.3%, in line with forecasts. Meanwhile, the US Producer Price Index (PPI) rose by 0.7% month-on-month and 1.6% year-on-year.

Industrial production slowed in August to an increase of 0.4% after rising by 0.7% in July.

The US labour market has been relatively static. The number of jobless claims rose by 3,000 in the week starting 4 September to 220,000 versus 217,000 for the previous week.

This data is likely to encourage the Fed to hold off on raising rates when its policy decision is announced on Wednesday. But given the strength of the labour market and the slower-than-expected shift towards lower inflation, no change in its restrictive stance is expected, meaning that one last rate hike could occur between now and the end of the year.

In Europe, the ECB raised its key interest rates by 25 basis points to 4.50% and 4.75%. The Governing Council stated that the process of monetary tightening was nearing its end and reiterated its belief that the current level of interest rates was sufficiently restrictive to bring inflation back towards the 2% target.

Eurozone inflation has picked up slightly, mainly due to higher energy and food prices. In contrast, core inflation has stabilised, adding weight to the idea that the ECB’s monetary tightening is probably over.

Industrial output in the currency bloc fell by far more than expected in July, hit by rising borrowing costs. It dropped by 1.1% month-on-month and 2.2% year-on-year.

The Chinese economy has bounced back, as testified to by the 4.5% rise in industrial production in August and the 4.6% recovery in retail sales.

The S&P 500 ended the week down by 0.16% while the tech-heavy Nasdaq dipped by 0.39%. The Stoxx 600 Europe index rose by 1.60%.

Source: Bonhôte

If you have any questions please contact the office on (03) 9670 6070.