The People's Bank of China (PBoC) today left the key interest rates for one-year and five-year loans unchanged in September, after which the stock markets in Asia came under pressure across the board. All eyes are now on the Federal Reserve (Fed), which will announce its highly anticipated interest rate decision tonight (8:00 p.m.). After the European Central Bank (ECB) tightened the interest rate screw once again last week, it remains uncertain whether the Fed will pause on interest rates. Investors will also focus primarily on the monetary policy outlook.
China's central bank kept its key interest rate unchanged at 3.45% for one-year loans and 4.2% for five-year loans. Given the signs of economic weakness, further easing had been expected. The offshore yuan gained slightly after the rate decision, trading at 7.3025 against the US dollar after the Chinese currency hit a record low on 8 September. Stock markets in the Asia-Pacific region then fell across the board. Hong Kong's Hang Seng Index fell 0.75% and mainland Chinese markets were also down, with the CSI 300 falling 0.4%. In Australia, the S&P/ASX 200 fell 0.65% and South Korea's Kospi slipped 0.2%. In Tokyo, the Nikkei 225 traded 0.6% lower and the Topix lost 0.9%. Japan's trade deficit narrowed by two-thirds year-on-year in August, while imports and exports posted smaller-than-expected declines.
In New York, stock markets remained on hold ahead of the Federal Reserve's interest rate decision. The Dow Jones Industrial closed at 34,517.73 points, down 0.31% from the previous day's close. The market-wide S&P 500 fell by 0.22% to 4,443.95 points and on the Nasdaq, the indices fell by about 0.2%. Meanwhile, oil prices continued to climb and approach the round mark of USD 100. The yield on ten-year US government bonds eased slightly and is quoted this morning at 4.37%. New economic data from the US housing market yesterday provided no real impetus. The number of building permits rose unexpectedly strong in August by 6.9% over the previous month. Analysts had expected a moderate decline. New housing starts, however, slumped by 11.3% at the same time (consensus -0.9%), as reported by the Commerce Department in Washington.
In the euro area, inflation weakened more than expected in August. According to Eurostat, the inflation rate last month was 5.2% for the year. A preliminary estimate had still assumed 5.3% after 5.5% in July. Core inflation was also somewhat more moderate. Excluding energy and food prices, which are often susceptible to fluctuations, the rate fell from 5.5% to 5.3%. Nevertheless, inflation remains high, especially for food, at 10.3% (July 11.3%).
France's central bank chief and ECB Governing Council member Francois Villeroy de Galhau expects interest rates in the euro zone could remain stable for an extended period. "We have the right dose, but we need to take the medicine for a sufficiently long time, then we will see a slowdown in inflation." As recently as last week, the ECB had raised key interest rates for the tenth consecutive time but held out the prospect that rates may have peaked.
In its economic outlook presented yesterday, the Organization for Economic Cooperation and Development (OECD) predicts "subdued growth prospects for the global economy in the coming year". It said the outlook is weak despite a better-than-expected first half of the year and inflation is proving stubborn. Against this backdrop, the OECD forecasts global economic growth of 3.0% in the current year and 2.7% in 2024. The OECD also warned of several downside risks, such as a further slowdown in China.
Corporate news in focus: FedEx and General Mills with Q1 figures and Boston Scientific investor day.
Economic data in focus: Germany and UK producer prices August (08:00 a.m.). From the US MBA mortgage applications (01:00 p.m.) and interest rate decision of the Federal Reserve (8.30 p.m.).
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Editor: Alessandro Fezzi
Source: LGT Bank (Switzerland) Ltd.