The focus areas during the week included:

The S&P 500 Index declined by a substantial -2.9% for the week, recording its largest one-day loss in the past six months on Thursday (-1.6%). Market participants reacted negatively to hawkish comments/forecasts from the Federal Reserve. The S&P has declined in each of the past three weeks, dropping by a total of -4.2% in the month to date. Worries about the impact of the United Auto Workers’ strike and the potential for a US government shutdown in October may also have weighed on markets.

The US 10-year government bond yield trended The US 10-year government bond yield rose to 4.5% (its highest level in 16 years), as the Fed’s “higher for longer” message continues to pressure the bond market. Unsurprisingly, the two-year US government bond yield ended the week above 5% for the seventh consecutive trading day. Critically, most major central banks have warned recently that rates could rise again before year-end, should inflationary pressures not abate further, and warned against premature expectations of rate cuts.

The STOXX Europe 600 Index ended declined by 1.9% in the week as the major central banks signalled that interest rates will stay high for longer than previously anticipated. France’s CAC 40 declined 2.7%, Germany’s DAX lost 2.3%, and Italy’s FTSE MIB slipped 1.1%.

A total of 48 central banks scheduled interest rate meetings for September. During the past week the US, UK, SA, Egypt, Philippines, Indonesia, and Taiwan all left rates unchanged. In contrast, Sweden, and Norway both increased interest rates and kept the door open for another increase in November, while Turkey’s central bank pushed rates up by a further 500 bps.

The US Federal Reserve left the Federal Funds target interest rate unchanged at a range of 5.25% to 5.5%. This was in line with expectations. The Federal Open Market Committee (FOMC) also released its updated Summary of Economic Predictions (SEP), which reflected one more rate hike in 2023 (only seven of the 19 FOMC participants believe the Fed funds rate is currently restrictive enough). In addition, policymakers surprised markets by changing their expectations for rate cuts in 2024. Previously the SEP reflected four rate cuts of 25 bps each in 2024. This has been revised to only two cuts. The tone of Fed Chair Jerome Powell’s press conference was generally hawkish, keeping the door open for future hikes.

The FOMC also revised up its growth estimate for 2023 from 1% to 2.1%, acknowledging that the economy has been more resilient than expected. The growth estimate for 2024 was also revised higher from 1.1% to 1.5%. Interestingly, despite the upward revision to GDP estimates, the FOMC revised down its inflation forecast. In particular, the median expectation for core PCE in 2023 was lowered from 3.9% to 3.7%.

The BoE’s Monetary Policy Committee voted five to four to keep the key policy interest rate unchanged at 5.25%. This is the first pause in rate hikes since December 2021. However, BoE Governor Andrew Bailey stressed that borrowing costs could rise again if there was evidence of more persistent inflationary pressures. Similarly, the Swiss National Bank (SNB) also kept rates unchanged at 1.75%, which is its first pause since March 2022. Importantly, the Swiss policy officials indicated that more increases are possible if it becomes clear that price stability is not being maintained.

The South African Reserve Bank (SARB)’s Monetary Policy Committee (MPC) voted three to two to leave the repo rate unchanged at 8.25%. This was in line with expectations, however the tone of the MPC statement was hawkish. The MPC acknowledged at the Friday analysts meeting that a hike of 50 bps was discussed. While a further rate hike in November is not assured, SA’s consumer inflation is likely to accelerate over the next two months, given the recent fuel and energy price increases and rand weakness.

South Africa’s consumer inflation rate increased marginally in August to 4.8% y/y, up from 4.7% in July. At the same time core inflation rose to 4.8%, up from 4.7% in July. While South African inflation is well inside the target range of 3% to 6%, the SARB has highlighted the importance of anchoring inflation expectations at the midpoint of the inflation target.

South African retail sales, which represent a very significant portion of total consumer spending, declined, or remained unchanged in 12 of the past 19 months. The sector has declined by a total of 3.3% (in real terms, seasonally adjusted) since the beginning of 2022 and is essentially heading into recession.

US weekly jobless claims fell to a very modest 201 000, below market expectations. This is the lowest level of jobless claims since January, further reinforcing the view that the US labour market remains strong – certainly stronger than expected, given successive interest rate hikes.

The US Leading Economic Indicator (as compiled by the Conference Board) declined by a further -0.4% in August 2023. The index has declined each month for the past 17 consecutive months and continues to signal that the US is heading into recession.

On Thursday (as reported by state media), China’s cabinet, the State Council, pledged to accelerate measures to consolidate the country’s recovery and continue supporting growth in 2024. Senior officials acknowledged that while China faces economic challenges, historical trends suggest that the economy is set to improve over the long term.