The most recent meeting of central bankers in Jackson Hole, USA, did not yield any new insights into monetary policy. Both the US Federal Reserve (FED) and the European Central Bank (ECB) remained determined in their fight against inflation. Interest rates are expected to remain high if necessary, as the 2% target has not been reached in many places. However, none of the representatives wanted to be very specific, so the next decisions are likely to remain highly data-dependent. Until mid-month, the markets experienced noticeable losses of 5-6%, but these were almost completely recovered by the end of the month. Macroeconomic data from China still show little positive trends and indicate a persistently weak economy. Falling house prices for two consecutive months further reinforce this trend, and the Chinese authorities are only cautiously stimulating the economy. Europe also reports weak figures, especially in the service sector. In the United States, mortgage applications reached their lowest level since 1995, while 30-year mortgage interest rates rose to 7.5%, similar to the levels seen in 2000. The US fiscal budget is unusually expansionary due to the COVID pandemic, despite the absence of a recession or wartime conditions. It is concerning that over 14% of US tax revenues are being spent on interest payments for debt, with a rising trend, and approximately 31% of government bonds will mature within the next 12 months (see FOCUS). The generous government could be the reason for an extended economic cycle.
August began for the stock markets with a noticeable downward movement, triggered by ongoing concerns about rising interest rates. These worries resulted in losses of about 5-6% in global stock markets. However, over the course of the month, the situation almost completely reversed as weak economic data reinforced expectations of relaxation in the bond market. The catalyst for the easing of interest rates was slightly weaker job market data from the United States. Weak data, even though it makes an impending recession more likely, is currently welcomed by investors. Market participants infer that interest rates are likely to rise only modestly further after reaching 15-year highs, and central banks, in particular, may signal the end of the rate-hiking cycle. Notably, stock risk premiums remain exceptionally low compared to historical norms. The fact that dividend yields in the United States are negative in relation to 2-year interest rates (-3.3%) raises concerns about a possible overvaluation of the US stock market, even though the picture may be somewhat distorted by large-cap technology stocks. Therefore, the market's vulnerability lies clearly in the return of inflation and an unexpectedly aggressive approach by the US central bank.
The beginning of the month brought significant pressure on global government bonds. 10-year US bonds briefly surged to over 4.3%. Only disappointing labor market data could stem the selling of bonds. The pressure for higher interest rates may persist, partly due to the refinancing needs of the US Treasury in the coming 12 months and the high ongoing US government spending. Since the fourth quarter of 2022, the number of credit downgrades by rating agencies has exceeded the number of upgrades. This could indicate the impact of higher interest rates on the credit quality of individual debts, especially as the ratio of downgrades to upgrades has now turned positive since the start of the interest rate hikes. Likewise, the number of bankruptcy filings in the USA has been on the rise since then.
The US dollar strengthened once again (+1% against the CHF), while the Norwegian Krone, in particular, weakened. The lack of impetus from China led to weakness in industrial metals such as iron ore, aluminum, and copper, which were traded with losses ranging from 3-7%. The price of gold managed to hold above the crucial support level at $1900 per ounce against the USD.
The outlook presents a scenario in which investors are banking on perfect disinflation. This expectation is based on the idea of a balanced dynamic – perfect disinflation coupled with a job market that is neither excessively strong to jeopardize this scenario nor too weak to stoke deep recession fears. The remarkably low stock risk premiums further underscore this expectation. However, current valuation levels should not be ignored, serving as a reminder to stay grounded in the reality of the markets. Another aspect to consider is the double-edged sword of Chinese growth. Chinese authorities would likely need to stimulate more decisively to prevent a potential deflationary spiral. The effects of these stimuli are likely to result in higher global inflationary pressures. Without robust stimulus, the world's second-largest economy lacks a significant growth catalyst. Overall, a complex picture is emerging, emphasizing the balance between inflation, growth, and the risk of recession. The interplay of these factors continues to guide our approach with a degree of caution. Historically, September has been the weakest month for the stock markets. The recent volatile ups and downs have somewhat cooled investor sentiment.