Macroeconomic Overview
In the US, nonfarm payrolls rose by 142,000 in August, improving from July but falling short of forecasts. The unemployment rate edged down to 4.2%, and wage growth exceeded expectations, reflecting a resilient labor market. The Federal Reserve responded by cutting interest rates by 50 basis points, bringing the rate to 4.75%-5.00%, signalling confidence that inflation is moderating. US inflation slowed to 2.5% in August, its lowest since 2021, although housing costs remain a concern, contributing to ongoing price pressures.
In Europe, inflation declined to 2.2%, with reductions in Germany, France, and Spain. The European Central Bank (ECB) implemented a 25-basis point rate cut, its second this year, as the eurozone contends with sluggish growth and cooling inflation. While markets anticipate further rate cuts, ECB officials are cautious, opting for a data-driven approach to future policy decisions.
Geopolitical Risks
Tensions in the Middle East have intensified, especially in Lebanon, where Hezbollah vowed retaliation against Israel following a deadly attack in September. Despite the heightened elevated risks, markets have shown resilience, as seen in the ongoing decline in oil prices, driven largely by demand concerns from China.
Market Trends
US equities experienced minor declines, with the S&P 500 falling 0.9% over the past two months. Despite an all-time high in mid-September following the Fed’s rate cut, concerns about underlying economic weakness led to a pullback. European stocks remained stable, with Germany’s DAX up 1.0% while France’s CAC and the STOXX Europe 600 saw slight declines. In Asia, Japan’s Nikkei dropped over 10%, reflecting volatility from the unwinding of yen carry trades.
Bond yields in the US fell, with the 10-year Treasury yield down to 3.71%, driven by softer inflation data and expectations of further rate cuts. In Europe, yields also dropped, reflecting weaker economic outlooks across the region.
Gold performed strongly, rising 4.6% to a new high of $2,611, as market volatility and recession fears boosted demand for safe-haven assets. Conversely, Bitcoin fell by 7.5%, as riskier assets faced greater selling pressure.
Currency Trends
The US dollar weakened over the past two months, with the Dollar Index down 3.2%, driven by falling Treasury yields. The euro gained 2.1% against the dollar, while the Japanese yen surged 10.3% as speculators unwound carry trades. The British pound also strengthened, rising 1.9% against the dollar, reflecting optimism about the UK economy.
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