In the United States, signs of deceleration were mainly due to soft business investment although consumer spending continues apace. In the eurozone, the situation in the manufacturing sector has deteriorated further, with industrial production in Germany proving particularly weak. This is the view of Guy Wagner, Chief Investment Officer at BLI - Banque de Luxembourg Investments, and his team, in their monthly analysis, ‘Highlights’.
Although activity is considerably more robust in the services sector, the rate of growth slowed markedly in September. In Japan, weak external demand is weighing on business investment as companies are cautious about increasing their production capacities. In China, the government's stimulus measures are still relatively contained, with Beijing apparently reluctant to generate a sharp acceleration in growth at the cost of further ramping up its debt.
Inflation rates are fairly static at present, holding to contained levels in practically all regions. In the United States, headline inflation dipped from 1.8% to 1.7% in August; excluding energy and food, the inflation rate rose from 2.2% to 2.4%. The Federal Reserve’s preferred inflation indicator, the PCE (personal consumption expenditures) deflator excluding energy and food, rose slightly from 1.7% to 1.8%. In the eurozone, headline inflation fell from 1% to 0.9% in September, still well below the ECB’s target of 2.0%. Excluding energy and food, inflation increased from 0.9% to 1%.
As expected, the US Federal Reserve cut its key interest rate by 25 basis points for the second time in two months, taking the fed funds rate to a range between 1.75% and 2.00%. At the press conference, Fed Chairman Jerome Powell was relatively vague about the monetary committee’s future intentions, saying that further rate cuts would be necessary if the economy showed any major signs of weakness, although he was not forecasting or expecting this. In Europe, at the penultimate meeting before his term of office expires, ECB President Mario Draghi announced a number of economic stimulus measures. These included the ECB cutting its deposit rate from –0.4% to –0.5% and reactivating the government and corporate bond buyback programme to the tune of 20 billion euros every month from November, with no commitment to an end date. Draghi’s measures were not unanimously supported by the Governing Council: notably, the German, French and Dutch representatives considered them excessive in the current economic conditions.
After the significant decline in yields to maturity on the bond markets in the first eight months of the year, yields rose slightly in September. The yield on the US 10-year Treasury note gained 17 basis points, climbing from 1.50% to 1.67% during the month. In the eurozone, the 10-year government bond yield rose from -0.70% to -0.57% in Germany, from -0.41% to -0.28% in France, and from 0.10% to 0.14% in Spain, but declined from 1.00% to 0.82% in Italy.
After a weak first fortnight in August, equity markets resumed the upward trend seen at the start of the year. The MSCI All Country World Index Net Total Return expressed in euros was up 3.1% in September, taking its performance since the beginning of the year to 21.8%. Over the month, the S&P 500 gained 1.7% (in USD), the Stoxx 600 in Europe 3.6% (in EUR), the Topix in Japan 5.0% (in JPY) and the MSCI Emerging Markets 2.9% (in USD). Despite the global economic slowdown, September’s rebound was led by financials and cyclicals while defensives (like consumer staples and health) trailed the field.
The euro's weakness against the dollar continued in September, with the euro/dollar exchange rate dropping from 1.10 to 1.09 over the month. The greenback was boosted by the more robust economic situation in the United States, numerous geopolitical uncertainties, and the eurozone’s resumption of quantitative easing.