China’s economic indicators have started to improve. US stock indices are under pressure from the risk of economic instability

As of Friday’s stock market close, the Dow Jones Index (US30) decreased by 0.83% (0.09% for the week), while the S&P 500 Index (US500) fell by 1.22% (0.68% for the week). The NASDAQ Technology Index (US100) closed Friday negative by 1.56% (1.27% for the week).

The US dollar came under pressure on Friday after reports from the University of Michigan on consumer sentiment and inflation expectations fell more than expected, a dovish factor for Fed policy. The University of Michigan’s inflation expectations for September unexpectedly fell to a .5year low of 3.1%, better than expectations of 3.5%. The University of Michigan’s US Consumer Sentiment Index for September fell by 1.8 to 67.7, weaker than expectations of 69.0. Other data showed that US manufacturing output for August rose by 0.1% m/m, in line with expectations. Industrial production rose by 0.4% m/m in August, stronger than expectations of 0.1% m/m.

The Fed will hold its monetary policy meeting this week. Economists believe that economic instability in the US (as indicated in past FOMC minutes) could go too far and increase the likelihood of a recession. Given this risk, as well as the positive trend in inflation and labor costs, analysts predict that the Fed will hold the rate for several months, and the data flow will gradually weaken the case for a rate hike in November or December. Markets rate the odds of a 25 bps rate hike at the September 20 FOMC meeting at 4% and a 25 bps rate hike at the November 1 FOMC meeting at 33%.

In Canada, the government has begun to tackle the housing crisis. In an effort to boost supply, the Canadian government announced Friday that it will eliminate the federal 5% consumption tax on the construction of new rental apartments and urged cities to be more proactive in addressing the problem.

Equity markets in Europe were mostly up on Friday. Germany’s DAX (DE40) increased by 0.56% (+0.60% for the week), France’s CAC 40 (FR40) gained 0.96% (+1.42% for the week), Spain’s IBEX 35 (ES35) added 0.01% (+1.55% for the week), and the UK’s FTSE 100 (UK100) closed up by 0.50% (+3.12% for the week). The ECB’s hawkish comments on Friday provided a boost for the euro, with European indices also reacting positively. ECB President Lagarde said that the ECB is not discussing cutting interest rates. Meanwhile, ECB Governing Council representative Vasle said that core inflation remains relatively high and did not rule out further interest rate hikes.

Silver (XAGUSD) gained support on Friday after strongerthanexpected reports on Chinese industrial production for August and US industrial production for August were stronger than expected, which is favorable for demand for industrial metals.

A weaker dollar on Friday provided support for energy prices. In addition, strongerthanexpected economic reports from China, the world’s secondlargest oil consumer, supported energy demand. Crude oil has been supported since last Tuesday when the International Energy Agency (IEA) and OPEC said the global oil market will be in deficit for the rest of the year. On the bearish side was Friday’s drop in stocks, which undermined confidence in the outlook for the economy and energy demand.

Asian markets were mostly up last week. Japan’s Nikkei 225 (JP225) gained 2.58% for the week, China’s FTSE China A50 (CHA50) fell by 1.33%, Hong Kong’s Hang Seng (HK50) ended the week up by 1.34%, and Australia’s S&P/ASX 200 (AU200) ended the week positive by 1.71%.

The only data to focus on for China this week will be the PBoC’s decision on 1year and 5year loans on Wednesday. After commercial banks left the 1year mediumterm lending rate unchanged at 2.50% on Friday following a 25 basis point cut in the commercial banks’ reserve requirement ratio, it is likely that the 1year and 5year lending rates will remain unchanged at 3.45% and 4.2%, respectively. China’s economic data has recently started to improve. Retail sales rose by 4.6% y/y in August, beating the consensus forecast of 3% as well as July’s 2.5%, the highest growth rate since May. The August industrial production figure also beat expectations of 3.9% and rose 4.5% y/y, the highest rate since April.

S&P 500 (F)(US500) 4,450.32  −54.78 (−1.22%)

Dow Jones (US30) 34,618.24 −288.87 (−0.83%)

DAX (DE40)  15,893.53 +88.24 (+0.56%)

FTSE 100 (UK100) 7,711.38 +38.30 (+0.50%)

USD Index  105.33 −0.07 (−0.07%)

by JustMarkets, 2023.09.18