Bond and equity markets remained relatively calm in the early part of last week despite higher-than-expected US CPI data. The market attributed the jump in inflation to a possibly transitory rise in energy prices and air travel. Volatility crept in on Thursday, as the IPO of British chip maker ARM seemed to set animal spirits alight, with markets up by around 2%. By the US close on Friday, optimism had dissipated on fears that a further Fed rate hike could be on the way. Thus, US markets closed flat for the week, although other markets fared much better.

In the European market, the European Central Bank (ECB) raised interest rates for the 10th consecutive time. The ECB hinted that it could be nearing the end of its monetary tightening campaign. Industrial production levels in the eurozone reported weaker than expected in July due to sharp declines in the output of durable consumer and capital goods. However, European bond yields edged upwards, underscoring the upwards pressure still being exerted on yields by bond issuance trends and the uncertainty around inflation. The UK economy shrank faster than expected in July due to worker strikes, wet weather, and rising borrowing costs. Unemployment unexpectedly increased to 4.3% in the three months through July.

In Japan, Bank of Japan (BoJ) Governor, Kazuo Ueda, hinted that the central bank could have enough data by year-end to judge if wages will continue to rise. This led to speculation about potential BoJ monetary policy normalization, sending Japanese government bond yields to their highest level since 2013.

In China, the economy showed signs of stabilization as industrial production and retail sales grew slightly more than expected. The consumer price index rose 0.1% in August, up from July’s 0.3% decline, assuaging concerns of a Japanese-style deflation. The People’s Bank of China (PBOC) cut its reserve ratio requirement by 25 basis points for most banks, injecting more liquidity into the financial system. Many economists predict that the PBOC will engage in further policy easing for the rest of 2023.

Australian, European, and UK markets all ended the week up by 2-4%, largely due to the strong performance of energy, resource, and luxury goods companies that are highly dependent on Chinese exports, as well as some of the Asia-centric UK banks. All of this suggests that the underlying cause of optimism in markets was the slightly better-than-expected news from China, and that is where traders really want to see a soft landing.

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