Markets in a Minute – Global markets surge to record highs in August
August was another record-breaking month for global markets, with several major stock market indices pushing through all-time highs. Gains were fuelled by resilient corporate earnings, optimism over further central bank policy easing following dovish signals at the annual Jackson Hole economic symposium, and sustained risk appetite despite lingering concerns over growth and fiscal positions. In the US, attention centred on signs of a cooling economy. July’s non-farm payrolls grew by just 73k, well below expectations, with prior months revised down. The slowdown added weight to the view that the Federal Reserve (Fed) would cut interest rates in its September meeting. At Jackson Hole, Fed Chair Jerome Powell struck a careful balance between acknowledging inflation pressure and cautioning that risks remain.
UK interest rates cut, but BOE warns of risks ahead
- In a 5-4 decision by the Monetary Policy Committee, the Bank of England (BoE) lowered its key interest rate by 0.25% to 4.0%, noting concerns over a weakening labour market. Governor Andrew Bailey said the decision was “finely balanced” and that interest rates were still on a cautious, but downward path.
- The BoE also forecast inflation could reach a two-year high of 4% in September, from 3.6% in August, and warned of risks of further price increases over the coming years.
- Reaffirming the BoE’s comments, UK annual consumer price index (CPI) inflation was reported at 3.8% in July, an increase from 3.6% in June, the highest level in a year-and-a-half. The rise was primarily driven by an increase in services inflation, with volatile air fares and accommodation services categories collectively adding 0.2ppts.
Fed acknowledges US economic difficulties as data supports the story
- Fed Chair Powell used his Jackson Hole address to acknowledge the challenge of tackling inflation pressures while signs of weakness emerge in the US labour market – highlighting the difficulty of balancing the Fed’s dual mandate of price stability and full employment. However, Powell asserted that the balance of risk appears to be shifting in favour of changing the central bank’s current policy stance.
- Inflation edged higher in July, as the core Personal Consumption Expenditures (PCE) price index rose 0.3% month-on-month, in line with consensus estimates, according to the Bureau of Economic Analysis (BEA).
- The BEA also released a second estimate of US gross domestic product (GDP) growth, showing economic expansion of 3.3% over the year to the second quarter, up from initial estimates of 3%. Higher consumer spending was one of the main drivers for the upward revision.
- Consumer inflation expectations for the year ahead were revised down in the final reading, from 4.9% to 4.8%, although still above July’s 4.5%. Long-run expectations were also revised lower, typical for the final release, and now stand at 3.5%, up from 3.4% in July.
Japan’s stubborn inflation after decades of stagnation raises expectations of rate hikes
- In Japan, core consumer prices increased by 2.5% year-on-year in August, the third consecutive month of slowing price growth. The unemployment rate fell by more than expected in July to 2.3%, the lowest level since December 2019.
- Japan’s economy expanded faster than anticipated over Q2, boosting hopes of further rate hikes from the Bank of Japan. Japan’s real GDP increased by 0.3% quarter-on-quarter in Q2, after having gained by 0.1% in Q1.
August was another strong month for global markets, as market indices reached new highs on the belief that interest rates had further room to move downward. Japan topped the performance table, powered by strong corporate reforms, foreign inflows, and improved trade sentiment, while China’s markets advanced on optimism over artificial intelligence (AI) AI developments and potential central bank support. By contrast, European equities gave back some of their strong gains made since the start of the year – with France struggling due to an impending no-confidence vote in the prime minister and potential government collapse.
Bonds, particularly long-dated government debt, saw widespread underperformance as interest rates rose sharply on rising borrowing needs and political risks. Gold was a steady haven over the month, edging higher even as the US dollar softened and equities surged. With record -high equity markets, shifting central bank policies, and continued fiscal uncertainty, our investment partners feel the case for diversification remain strong.