The European Central Bank (ECB) increased its key interest rate to 4.5% from 4.25% on Thursday, its highest level since the euro launched in 1999. The move was largely anticipated. Stocks shot up as investors speculated that the world’s major central banks may be able to pull off a soft landing, a scenario that entails moderate inflation without too much economic damage, which many market participants had considered impossible just a few months ago.
The decision to hike rates at the ECB was the closest among the central bank's officials since the central bank began tightening last year. Despite speculations from market participants that peak rates have been reached and the ECB may begin cutting as early as early next year, ECB President Christine Lagarde reiterated at the press conference following the rate hike announcement that the central bank had not yet begun to think about rate cuts. The hike comes despite the European Commission cutting its outlook for the euro area to just 0.8% expansion this year, largely due to poor performance by the bloc’s largest economy, Germany. The euro fell around 0.5% against the US dollar after the ECB’s decision, while the Euro Stoxx 50 index finished Thursday up 1.3%.
In the US, higher energy costs were making themselves evident macroeconomic data releases. Retail sales jumped by 0.6% in August when compared to July, but most of that increase was due to higher petrol prices. The Producer Price Index also spiked the most in a year, up by 0.7% in August when compared to the previous month. While the Federal Reserve (Fed) has been making progress at slowing price increases, recent gains in energy prices have undone some of that progress. On Thursday, US crude oil was trading above the 90-dollar mark for the first time in nearly a year.
In New York, stock indices closed higher on Thursday as traders shrugged off inflation concerns and instead concentrated on the possibility that central banks could manage a soft-landing scenario in which inflation is tamed without wrecking the economy. The Dow Jones Industrial gained nearly 1% and the S&P 500 ended the session up 0.8%. The Nasdaq 100 also increased 0.8%.
In individual stocks, Arm shares, which started trading on Thursday at 56.10 US dollars per share on the Nasdaq on Thursday, closed 25% higher to end their first trading session at 63.59 US dollars. The British chip designer is the biggest initial public offering of the year so far and has been closely watched by investors as an indication of the health of the broader technology sector.
In the Asia-Pacific region, stock markets soared with most major indices making gains of 1% or more on Friday. Retail sails and factory output out of China both came in ahead of expectations, giving a boost to sentiment at the end of the week. Retail sales were up 4.6% on the year in August and industrial production increased 4.5%. Hong Kong's Hang Seng Index jumped 1.3%, while the Shanghai Composite couldn’t keep up with the region’s other major indices, falling 0.2%. In Tokyo, the Nikkei 225 was trading up 1.2% and in South Korea, the Kospi increased 1.1%. In Australia, the S&P/ASX 200 jumped nearly 1.5%.
In Switzerland, the Producer and Import Price Index fell by 0.2% in August when compared to the previous month. Pharmaceutical and chemical products saw the largest price cuts while energy costs were higher. When compared to the same month last year, all domestic and import products fell by 0.8%. Date released earlier this month showed consumer prices increased by 1.6% on the year in August, making it the third month in a row below the Swiss national Bank’s (SNB) target of 2%. The SNB will announce its next policy decision on Thursday of next week (September 21). The SMI finished Thursday’s session up 1.1%.
Corporate news in focus: Hennes & Mauritz Q3 revenue.
Economic data in focus: German wholesale prices (08:00 am CET), euro area trade balance (11:00 am), US Import and Export Price Index and Empire State Manufacturing Survey (02:30 pm), University of Michigan Consumer Sentiment Index (04:00 pm).
Publisher: LGT Bank (Switzerland) Ltd., Glärnischstrasse 36, CH-8027 Zurich
Editor: Alessandro Fezzi
Source: LGT Bank (Switzerland) Ltd.