Priority for price stability

Central banks set the tone in August: as the US Federal Reserve announced that it would prioritise price stability over growth and the labour market, market participants braced themselves for further rate hikes and stock markets in the US and Europe fell.

August showed two faces on the stock markets: Until around the middle of the month most stock exchanges were able to continue the recovery from previous month. In the second half of the month, they gave back what they had achieved and slipped into negative territory. The German DAX index lost -4.81% and the broad European Stoxx Europe 600 index -5.29%. In the USA the S&P 500 fell -2.88%, while Hong Kong's Hang Seng index rose slightly 0.42%. Global equities, as measured by the MSCI World, declined -2.97% - all index figures in euro terms.

Initially, the stock markets received a boost from good corporate figures for the second quarter. In addition, falling inflation data (in the U.S. from 9.1% in June to 8.5% in July) gave rise to hopes that inflation had peaked and that central banks would therefore no longer need to raise their key interest rates so aggressively.

However, the annual meeting of central banks in Jackson Hole (USA) abruptly changed the mood. Jerome Powell, Chairman of the U.S. Federal Reserve (Fed), announced the fight against inflation in his speech. To regain price stability, he said, the Fed would maintain its restrictive stance for some time, even at the expense of growth and the labor market - the decline of which should also help push inflation down. As a result, market participants expected further interest rate hikes and stock markets began to decline noticeably. Representatives of the European Central Bank were also hawkish on inflation - which reached a record 9.1% year-on-year in August – so, the majority of the market now expects a 75-basis-points rate hike from 0.50% to 1.25% in September.

A key driver of inflation were energy prices, led by gas, which rose a further 25.7% in August from a high level, partly because the Nord Stream 1 pipeline was again closed for maintenance towards the end of the month. With energy prices putting increasing pressure on the manufacturing sector and inflation weighing on consumer sentiment, business expectations remain pessimistic and uncertainty high. The German ifo business climate index fell to 88.5 points. This means that sentiment is as bad as it was in mid-2020 when Corona weighed heavily on the economy.

Bonds slipped against the backdrop of persistent inflation and related ongoing key interest rate hikes. Yields on European investment-grade bonds gained the most, rising 97 basis points to 3.36%, followed by 10-year German bunds, whose yield rose 72 basis points to 1.54%. With inflationary pressures in the U.S.A. perceived by the market to be somewhat lower, yields on U.S. paper did not rise quite as sharply. Investment grade bonds rose by 50 basis points to 4.83%, and the yield on 10-year U.S. Treasuries reached 3.19% (+ 54 basis points). As the yield curve in the U.S. shifted further in favor of two-year U.S. Treasuries - whose yield rose by 61 basis points to now 3.49% - market participants continue to assume that the U.S. is in recession. Gold was unable to benefit from the development due to the appreciating US dollar. The gold price fell from 1,762.52 to 1,725.84 US dollars/troz.


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