The unemployment rate in the USA rose to 4.3% in August. This is due to an increase in redundancies on the one hand and higher participation in the labor market on the other. The gradual cooling of the US labor market, together with a steady return of inflation towards 2%, has prompted the US Federal Reserve to talk more concretely about easing monetary policy for the first time in a long time. While the direction for interest rates is clear, the timing and speed of future rate cuts will continue to depend on economic data, according to Chairman Jerome Powell. However, it is expected that the first interest rate cut will take place in September. Inflation rates are also falling in Europe and are on their way towards the respective central banks' targets. Germany's preliminary inflation rate for August is down at -0.1%, which also applies to Switzerland - the national consumer price index fell by -0.2% in July. The picture for the European purchasing managers' indices is less clear: While the manufacturing PMIs of some European economies point to a contraction, the services sector remains in expansion territory. Against the backdrop of the European Central Bank's primary objective of ensuring price stability, a further interest rate cut should at least not be ruled out. One outlier in terms of monetary policy is the Japanese central bank, which raised its key interest rate to 0.25% at the end of July and thus contributed significantly to the market turbulence at the beginning of the month. In addition to the upcoming interest rate decisions by the ECB and the SNB in September, the markets are likely to focus more on the approaching US presidential elections in the coming weeks. There is nothing new from the East, with the Chinese economy continuing to lack growth momentum.
The month of August began with a sharp correction on the stock markets. Triggered by the Japanese central bank's interest rate hike, an enormous volume of carry trades in Japanese yen was closed out at an immense pace. This resulted in massive temporary price losses on various global stock indices. For example, the S&P 500 at times traded more than 7% lower than at the end of July and the Japanese Nikkei lost more than 20% within three days in the worst phase (-12% in one day alone). US technology stocks, which react very sensitively to a potential slowdown in growth, were also hit hard. The fact that most indices recovered so quickly over the rest of August suggests that the sell-off was mainly a technical correction in which fundamental facts played a subordinate role. Although NVIDIA was able to exceed the high consensus expectations for earnings, sales and margins at the end of the month, investors were still disappointed that the highest expectations were not quite met. The share price fell by 6.38% the following day, while the Nasdaq 100 technology index closed virtually unchanged. Such movements indicate that investors' priced-in expectations are very high in some segments and that it might be worth taking a look at parts of the market that have not been so hot. The S&P 500 thus rose by 2.4% and the Euro Stoxx 50 by 1.75% in August. The Swiss Performance Index was +0.90% higher at 16,504.15 points and even the Japanese Nikkei was able to limit its losses at -1.16% in August. The DAX and the SPI reached a new all-time high.
The yield on 10-year US Treasuries continued to trend in the same direction as in previous months, that is lower. After reaching an annual high of 4.74% in April, they are now yielding 3.9%, which is 0.15 percentage points lower than at the end of July. It is also worth noting that the inversion of the yield curve is nearing its end: while a 2-year US government bond was still yielding a good 22 basis points more than a 10-year bond at the end of July, it is now only two basis points higher. The weakness of the US dollar index, which lost a good 2.3% in August, was correspondingly pronounced. In addition to the US dollar, both the euro (-1.2%) and the pound sterling (-1.15%) lost 3.2% against the Swiss franc.
On the interest rate side, the market is now pricing in a total of four interest rate cuts for the rest of the year in the USA. In our view, such a high number of interest rate cuts would require a significant deterioration in economic data by the end of the year, which we do not currently expect. We are keeping our bond exposure limited in favor of decorrelating strategies with a tail-hedge character and are focusing on a mix of government bonds and corporate bonds from first-class borrowers. The setback at the beginning of August showed that surprises - both positive and negative - are often reflected very quickly on the markets. The time window for reacting to such surprises is often so short that forward-looking asset allocation is essential. We take this into account with appropriate diversification and hedging, which we have initiated at times of low volatility. We remain cautiously optimistic and would take advantage of tactical opportunities to increase our equity allocation in the event of stronger setbacks.