What’s going on in financial markets? Which macro themes should you watch? Drawing on our depth and breadth of market and economic expertise, Market Pulse brings you insights on the latest investment themes to help preserve and grow your wealth. 

Market views

• Last week, the focus was on Federal Reserve Chair Powell’s testimony to Congress, in which he said that the outlook is for modest growth, a slight rise in unemployment and declining inflation. Chair Powell stated that ‘we are within a couple of rate hikes of the level we need to get to’ and given that backdrop, it made sense to slow the policy tightening. This outlook is within current forecasts, so the testimony came as some relief. There might be disappointment if there are no cuts made in the first half of next year. 
• The Bank of England was expected to increase the policy rate by 25bps since its last monthly meeting, and BoE officials supported that. However, last week’s inflation figure came in well ahead of forecast and data watching BoE was forced to hike the policy rate by 50bps. This is why it is difficult to know when and where interest rates will peak.
• There was a more cautious sentiment in financial markets. Equities are down nearly 2% in Euro terms and 10-year yields are down nearly 20bps in the euro area. Weaker statistics from the euro area and disappointment regarding policy changes in China undermined risk assets, sending equity markets into defensive mode. Meanwhile, central bank actions have reminded us that they are still in tightening mode. In this environment, a slowing global economy and potential further rate rises, a defensive investment stance is best. 

Macro views

• Inflation data last week came from the UK, and it was a bit shocking. Both Headline and Core inflation (8.7% and 7.1% respectively) were up on a year-on-year basis, and it was the fourth month in a row where it was higher than expected. Services inflation was the culprit and has been up over the last number of months. Wage inflation is running higher in the UK than the euro area and Brexit is impacting the cost of goods and services so we may not see the same inflation path in the euro area. Let us hope not. 
• US Secretary of State Blinken’s visit to China fostered hopes of some policy stimulus. Expectations were elevated and got dashed. Nothing substantial came from Secretary Blinken’s meetings but at least there is dialogue. Some stimulus measures were announced but they were underwhelming. Certain interest rates were cut by 10bps and the only fiscal measure was incentives to purchase electric cars. One should not despair yet. The Politburo (Cabinet) meets next month and that is where any major policy initiatives will be announced. 
• The euro area business sentiment indices (PMIs) released last week were weaker than expected and slowed month-on-month significantly. The composite index dropped to 50.3, just about in expansion territory. The weakness came from both the manufacturing and services PMIs. The Manufacturing PMI sank further into recessionary territory standing at 43.6. On the brighter side, pricing sub-indices fell to the lowest level since 2021 for the services industries and 2020 for the manufacturing industries.

Chart of the week: Be careful what you wish for 

For some time, we have talked about the resilience of the US economy and the threat that hangs over it from the monetary tightening that has been implemented. But some sections of the US economy have already felt the effect of higher interest rates. In the chart above you can see that the US housing market went into a downturn very quickly. This is not surprising as housing demand is very sensitive to interest rates. What is surprising is the recovery during last month despite the still elevated interest rates. Message to the Federal Reserve: keep rates up and if needs be from an inflation point of view, move them higher.

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