Pictet Group
Weekly house view | Rates recalibration
The week in review
The Fed’s decision to “go big” and lower the Fed funds rate by 50 bps provided a fillip to equity markets last week. The large rate cut, on top of upbeat US economic data on manufacturing and retail sales, were seen as boosting the case of a “soft landing”, helping the S&P 500[i] to a 1.4% gain for the week (in USD) and a new record high. Unsurprising, equities in cyclical sectors were the big winners, as were small caps (the Russell 2000[ii] gained 2.1% on the week) while defensives lagged. The Stoxx Euro 600 retreated amid worries over the auto sector and a pullback in UK stocks, but US dollar weakness helped the MSCI EM[iii] index to a 2.3% gain (in USD). The Treasury yield curve steepened, with two-year yields flat on the week while 10-year yields rose. The US dollar declined against sterling last week and, to a lesser extent, the euro, but made gains against the yen after the Bank of Japan made it clear it was not in a hurry to raise rates again. Oil prices received a boost from the US rate cut and declining crude stockpiles, while gold continued to make little headway on the week.
Quote of the week
“This recalibration of our policy stance will help maintain the strength of the economy and the labour market,” Powell said after the Fed’s 50 bps rate cut.
Key data
Industrial production in the US rose far more than expected in August, climbing 0.8% on the previous month, and was flat on an annual basis. Retail sales rose 0.1% in August compared with 1.1% in July. The European Automobile Manufacturers Association reported an 18.3% decrease in new car registrations in August from a year before. In Germany, the latest ZEW Economic Sentiment index fell to an 11-month low. Annual core consumer inflation in Japan (excluding food) came in at the 2.8% in August, up from 2.7% in July. Japanese export growth slowed sharply in August, rising at an annual 5.6% compared with 10.3% in July. Japanese import growth was also sharply down. Elsewhere in Asia, Chinese new home prices dropped 0.7% in July, the 14th month of decline, while existing home prices dropped by 0.95%, their steepest decline since May.
[ii] Source: Pictet WM AA&MR, Thomson Reuters. Past performance, Russell 2000 (net 12-month return in USD): 2019, 25.5%; 2020, 20%; 2021, 14.8%; 2022, -20.4%; 2023, 16.9%.
[iii] Source: Pictet WM AA&MR, Thomson Reuters. Past performance, MSCI EM (Emerging Markets) (net 12-month return in USD): 2019, 18.9%; 2020, 18.7%; 2021, -2.2%; 2022, -19.7%; 2023, 10.3%.