Markets Slammed By Hawkish Rhetoric Despite Pause From The Fed
Equity markets around the world fell more or less in unison last week by about 3-4%, before bouncing slightly on Friday. The UK was really the only market to buck the trend, as the Bank of England unexpectedly kept rates on hold after inflation fell by more than forecast. By contrast, the S&P 500 Index recorded its largest one-day loss in six months on Thursday after the US Federal Reserve left interest rates unchanged (as expected), but surprised markets with a more hawkish outlook, forecasting rates to remain higher for longer than previously anticipated in 2024-2025.
US interest rates effectively represent the cost of money for the global financial system, and concerns about higher interest rates weighed on stocks around the world. The US is still, by most measures, the largest industrial economy in the world and by far the biggest in terms of consumption, so a potential US government shutdown and the United Auto Workers' strike also weighed on markets. The data continued to be mixed, with jobless claims pointing to ongoing labour market strength in the US, while housing starts declined more than expected.
The net effect of the Fed’s hawkishness was to drive Treasury yields higher again, with the 10-year yield reaching a 16-year peak. In the scheme of things, the 0.16% rise in long-term US rates last week might seem like small beer, but it was a move that also caused a 4% fall in equity markets. It was the usual tech suspects that proved the most susceptible, with stocks like Amazon, Nvidia, Tesla, and Microsoft all down between 5% and 10%.
Most European markets were also down by a similar amount, with higher energy prices also taking a toll on the energy import-dependent continent, while eurozone PMI data showed weakening business activity and orders, especially in manufacturing.
The Bank of England unexpectedly kept rates steady as UK inflation – though still amongst the highest in the developed world – slowed more than forecast in August, declining to 6.7% year-over-year. While the BoE still signalled that further hikes are likely, the UK market was a relative oasis of calm.
In Asia, Japan's Nikkei and broader TOPIX index declined as the Bank of Japan maintained its dovish monetary policy, which contrasts more and more with the Fed’s hawkish stance. China's stock market was volatile but finished the week on a high on optimism about economic stabilization, after August data beat estimates. However, risks remain surrounding the sheer volume of debt associated with troubled property markets.