Weekly Market Update | Week Ending 18 August 2023

• The US Federal Reserve leaves the door open to further tightening

• The People’s Bank of China unexpectedly cuts rates

• Annual inflation rate in Japan comes in above estimates

1. The US Federal Reserve leaves the door open to further tightening

US FOMC Minutes released on Wednesday (16 August 2023) revealed that with inflation still well above the 2% target and the labour market remaining tight, Federal Reserve officials continue to see significant upside risks to inflation, which could require further tightening in the future. Additionally, officials agreed that the level of uncertainty continues to remain high and that future rate decisions would continue to depend on future economic data in the coming months to clarify the extent to which the disinflation process progresses. The Fed Fund rate currently stands at 5.25%-5.5%, the highest level in more than 22 years after a 25bps rate hike in July.

In response, the US dollar continued its recovery, with the Dollar Index (“DXY”) rising above 103.5 and hovering at its highest level in two months. The US 10-year bond Yield also climbed past 4.25%, its highest since November 2007, as markets worry about prolonged periods of restrictive monetary policy. Higher yields and tight monetary policy continue to put pressure on US equities, as the Dow Jones, S&P 500 and Nasdaq all ended the week down -2.21%, -2.11% and -2.59% respectively.

2. The People’s Bank of China unexpectedly cuts rates

Meanwhile, over in China, the People’s Bank of China (“PBoC”) unexpectedly slashed the one-year Medium-Term Lending Facility (“MLF”) rates by 15bps to 2.50% on Tuesday (15 August 2023) in order to support its economy that is facing risks from a deepening property crisis and weak consumer spending. The PBoC also injected 204 billion yuan through seven-day reverse repos while cutting borrowing costs by 10bps to 1.80% from 1.90% previously. Despite an unexpected rate cut, China stocks continue to fall on the back of weak economic data and the lack of meaningful stimulus, leading to the Shanghai Composite ending the week down -1.79%.

3. Annual inflation rate in Japan comes in above estimates

Lastly, Japan’s annual inflation rate in Japan came in unchanged at 3.3% for July 2023 but was higher than the market consensus of 2.5%. Additionally, Japanese food prices continue to rise for 23 straight months, 8.8% from a year earlier in July 2023, the most since September 1976, after an 8.4% gain in the prior month. Meanwhile, core inflation fell to a 4-month low of 3.1% in July, from 3.3% in June, meeting consensus but still above the Bank of Japan’s (“BOJ”) 2% target for the 16th consecutive month. On a monthly basis, consumer prices rose 0.4%, the most in three months, after a 0.2% gain in June. The Nikkei 225 Index and Topix Index both ended the week down sharply at -3.15% and -2.87%, respectively, as markets reacted to Japan’s headline inflation beating consensus and tracking losses in the US due to renewed concerns that the US Federal Reserve could keep interest rates higher for longer due to possible upside risk to inflation.

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This Weekly Market Update is sourced from Bloomberg and various financial news.

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