Weekly Market Update Monday 18th September 2023

Wednesday's highly anticipated release of the US August Consumer Price Index (CPI) data revealed that the Federal Reserve has made progress in its battle against inflation. However, the surge in energy prices may prompt the central bank to further tighten its monetary policy. The headline CPI for August rose by 0.6%, marking a year-over-year increase of 3.7%, which was an acceleration compared to July's 3.2% pace. Notably, this increase largely aligned with expectations and was predominantly driven by higher energy prices. Gasoline prices, in particular, surged by 10.6%, contributing to more than half of the monthly CPI gain. Excluding food and energy, the CPI increased by 0.3% month-over-month, surpassing the consensus of 0.2%, and by 4.3% year-over-year, in line with expectations. In July, core CPI inflation stood at 4.7% year-over-year.

In Europe, the European Central Bank (ECB) raised interest rates for the 10th consecutive time and hinted at the possibility of nearing the end of its monetary tightening campaign. ECB President Christine Lagarde noted that a "solid majority" of policymakers supported a quarter-point rate hike, bringing the key deposit rate to a record high of 4.0%.

In the UK, the economy contracted more quickly than anticipated in July due to factors such as worker strikes, adverse weather conditions, and increasing borrowing costs, according to the Office for National Statistics. GDP declined by 0.5% sequentially after a similar increase in June. Unexpectedly, the UK unemployment rate rose to 4.3% during the three months through July, up from 4.2% in the previous three months, surpassing the Bank of England's forecast for the third quarter. However, total wage growth exceeded expectations, accelerating year-over-year to 8.5% over the three months through July.

During the week, US equity markets initially declined in anticipation of the CPI release, then rallied after robust retail sales data, but later pared gains on Friday due to auto worker strikes and increased volatility. Ultimately, US equities closed 0.12% lower. In contrast, European markets, including the STOXX 600 and FTSE 100, rose by 1.60% and 3.12%, respectively, despite the ECB's rate hike, indicating growing confidence that the ECB's tightening campaign may have concluded. Japanese stock markets gained 2.8% over the week, while Chinese equities displayed mixed performance as official indicators suggested potential stabilization in the country's economy, though concerns persisted regarding weakness in the property market.

With inflation and interest rates taking center stage, the yield on the 10-Year US Treasury increased to 4.32% following a strong CPI report and better-than-expected retail sales. Meanwhile, the 10-Year German Bund yield rose to 2.68% after the ECB's 25 basis point rate hike.

The price of U.S. crude oil climbed for the third consecutive week, surpassing $90 per barrel on Thursday for the first time since November of the previous year. This increase, approximately 14% over the past three weeks, was driven by renewed concerns over oil supply. Market sentiment reflected the impact of Saudi Arabia and Russia extending production cuts through the end of the year. The International Energy Agency (IEA) also projected that these cuts would result in a market deficit in the fourth quarter of 2023, underscoring concerns about supply constraints.