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Weekly Market Update Monday 28th August 2023

During the past week, remarks made by Jerome Powell, chair of the Federal Reserve, added to speculation surrounding the trajectory of interest rates, prompting investors to analyse potential outcomes. Despite this uncertainty, equity markets overall showed gains throughout the week, with growth stocks notably outperforming their value counterparts.

At this year’s Jackson Hole symposium, Chair Powell addressed the speculation that the Federal Reserve might tolerate or raise its inflation target, a notion proposed by some academics and market participants. Powell acknowledged the recent reports of subdued inflation but emphasized that this is merely the initial phase of a larger process.

The Federal Reserve is prepared to further increase interest rates if necessary, aiming to maintain higher borrowing costs until inflation shows sustained progress towards the central bank’s target. Powell’s statements indicated a possibility of an extended period of below-average economic growth and a softening labour market as prerequisites for achieving these goals. While Powell mentioned a cautious approach to future rate hikes, he did not imply that the ongoing robustness of economic expansion would inevitably lead to stricter monetary measures.

Economic indicators revealed a deceleration in U.S. economic activity during the week. Data from Thursday disclosed a significant 5.2% drop in new orders for durable goods in July, marking the largest monthly decline in over three years. Additionally, a separate report on Wednesday depicted a decline in business activity to a six-month low. In the housing sector, increased mortgage rates led to a decline in U.S. sales of existing homes for July, reaching the lowest point for that month since 2010. Sales in July fell by 2.2% compared to June 2023 and showed a 16.6% decrease from July 2022, according to the National Association of Realtors.

In corporate earnings news, Nvidia, an American chipmaker, reported remarkable revenue of $13.5 billion in the second quarter of 2023, doubling its earnings from the corresponding period of the previous year. The company, known for selling its high-priced h100 chips, projected $16 billion in sales for the upcoming third quarter. Nvidia also pleased investors by announcing a stock buyback of $25 billion.

U.S. equities concluded the week with a 0.8% increase, with the technology sector driving a 2.3% gain, largely attributed to Nvidia’s strong earnings report. In Europe, stocks climbed 0.66%, aided by a drop in European natural gas prices and increasing expectations of a potential peak in interest rates. Meanwhile, the UK’s FTSE 100 rallied by 1.05%. In contrast, Chinese stocks faced a decline as investors grew more pessimistic about the country’s economic outlook, resulting in the country’s blue-chip index trading at its lowest level since November 2022.

After reaching its highest intraday level since late 2007 on Tuesday, the yield on the 10-year U.S. Treasury note retraced to end the week with relatively little change at 4.24%. Eurozone bond yields decreased, with 10-year German sovereign yields finishing lower. Economic data indicating a weakening European economy prompted financial markets to adjust their expectations regarding future interest rate hikes. In the realm of commodities, oil prices on Friday hovered around $80 per barrel, a decrease from the previous $84 as of August 9, when oil prices reached their highest point for the year.

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