Global equity markets had a tough start to August, as Fitch Ratings unexpectedly downgraded the U.S.’s credit rating from AAA to AA+. This marked the second credit downgrade in U.S. history, raising concerns about the country’s fiscal outlook and highlighting ongoing fiscal challenges worldwide. While the impact on financial markets may be limited, it remains an important development.

U.S. employment data was in the spotlight this week, with data showing that 187,000 jobs were added in July, similar to June’s figures. This suggests that the pace of job growth has slowed compared to earlier months, where an average of 287,000 jobs were added per month in the first half of the year. The unemployment rate declined slightly to 3.5%, and wages grew by 4.4% year-on-year, indicating that the U.S. labour market is cooling just enough, adding more support to a possible soft landing for the world’s largest economy.

Other U.S. economic indicators were mixed in July, with some meeting expectations and others falling short. The eurozone, on the other hand, saw a surprising 0.3% growth in Q2, exceeding expectations. Inflation in the euro area slowed to 5.3% in July but remained well above the European Central Bank’s target of 2%.

The Bank of England (BoE) raised its key interest rate to 5.25%, the highest in 15 years, with plans to keep rates high to combat inflation. The BoE’s economic growth estimates for this year and the next remained at 0.5%. However, the UK housing market faces challenges with falling house prices and the first quarterly decline in net mortgage lending since 1987.

China experienced a decline in its manufacturing PMI, signalling contraction, while home sales faced setbacks. However, the services PMI showed growth, highlighting resilience in the services sector. In Japan, the unemployment rate improved, together with services PMI, but the manufacturing PMI fell below expectations.

In other news, heads of state from BRICS nations are set to discuss the enlargement of the group. Twenty-two nations have asked formally to become full-time members of the group, and more than 20 others have submitted informal requests. China seeks rapid expansion, while India and Brazil have concerns about the rules and potential repercussions on international relations.

Global equity markets concluded the week with losses. In the U.S., the Dow Jones (-1.11%), S&P 500 (-2.27%), and Nasdaq (-2.85%) all closed the week in the red. Similarly, European and Asian markets, including the Euro Stoxx 50 (-2.99%), FTSE 100 (-1.69%), Nikkei 225 (-1.73%), and Hang Seng (-1.87%) indices, experienced declines, with the Shanghai Composite Index (+0.37%) being the exception.

On Thursday, the Bank of England, implemented a 50 basis point interest rate hike (pushing the lending rate to 5%), surprising markets that had priced in a 60% chance of a 25 bps hike. Following the decision, markets saw a nearly 50% chance that Bank Rate would peak at 6.25% by the end of this year. The move comes after U.K’s May inflation figure was published on Wednesday, which showed that inflation in the region remains stubbornly high, with core inflation rising to its highest level since 1992. Headline inflation defied predictions, coming in at 8.7% y/y vs 8.4% expected, keeping in line with April’s figure. Core inflation jumped 7.1% y/y, up from 6.8% in April. In May, the central bank forecasted that inflation would drop to just over 5% by year end and be below its 2% target in early 2025.

Keeping with the inflation theme, U.S. Federal Reserve Chair Jerome Powell stated this week, while addressing the Senate Banking Committee, that more rate hikes may be needed this year. Powell additionally mentioned that policymakers feel “it will be appropriate to raise rates again this year, and perhaps twice,” if the economy performs about as expected. Decisions will be made on a meeting-by-meeting basis, Powell said, while noting that there is a long way to go to get inflation back down to its 2% goal.

The latest release of flash purchasing managers index’s (PMI) data on Friday indicates a stagnation in the eurozone economy. The composite S&P Global PMI registered at 50.3. The manufacturing index declined from 44.8 in May to 43.6, while the services measure experienced a significant monthly deterioration, dropping from 55.1 to 52.4, which is an unusually substantial decrease.

On Saturday, Russian President Vladimir Putin made a firm commitment to mete out consequences to those responsible for an “armed uprising” following the apparent insurrection led by the head of the Wagner private military group – which threatened to end Putin’s 24-year rule. The insurrection involved taking control of military installations in two Russian cities, namely Rostov-on-Don and Voronezh, and included a warning that the troops could advance towards Moscow. In a sudden change of direction, Yevgeny Prigozhin, the leader of Wagner, announced that he had halted the advance of his troops towards Moscow and issued orders for them to evacuate Rostov. As part of a negotiated agreement facilitated by Belarus, Prigozhin agreed to depart from Russia and relocate to Belarus. In a statement, Prigozhin said that he wanted to avoid the spilling of “Russian blood”.

This week, the yen continued to depreciate against other major currencies, crossing the 143 mark against the dollar, coinciding with Japan’s announcement of its highest core inflation rate since 1981, standing at 4.1%. While other central banks adopted a more hawkish stance, the Bank of Japan maintained its super loose monetary policy approach. If the yen experiences further decline, it may necessitate adjustments to the Bank of Japan’s yield curve control policy.

No major indicators were released in China during the week. However, mounting evidence that the country’s recovery is losing steam raised fresh concerns about the economic outlook. China’s People’s Bank of China was the lone major central bank to lower rates this week, cutting the important loan prime rate 0.1% to 4.2% in an effort to lower borrowing costs and boost confidence and consumption.

On the market front, global indices ended the week in the red. Growth stocks outperformed value shares, while large-caps fared better than small-caps. The S&P 500 Index fell -1.39%, while the Dow Jones slipped -1.67%. The technology-heavy Nasdaq Composite had a strong start to the week but ended the week down -1.44%. Shares in Europe (Euro Stoxx 50, -2.80%)  and the UK (FTSE 100, -2.37%) fell over the week on worries that further interest rate increases might cause a recession in Britain and the eurozone.

Chinese shares (the Shanghai index) ended the week down -2.30%, while in Hong Kong, the benchmark Hang Seng Index declined -5.74%, its largest drop in three months. In Japan, the Nikkei 225 fell -2.74%. Gold dipped -1.84% while Brent Oil declined by -2.52% over the week.

In May, the inflation rate witnessed a notable decrease, reaching its lowest annual level in over two years, as reported by the Labor Department. The consumer price index rose by only 0.1% during the month, resulting in a decline in the annual rate from 4.9% in April to 4% in May. While there has been some easing of price pressures, core inflation, which excludes volatile food and energy prices, increased by 0.4% for the month and remained 5.3% higher than the previous year.

At the wholesale level, US inflation has also experienced a decline, falling well below its pre-pandemic average. The Producer Price Index data released by the Bureau of Labor Statistics shows a modest 1.1% annual increase for the 12-month period ending in May, a sharp drop from the 2.3% growth recorded in April. This marks the lowest annual level since December 2020, with energy and food prices playing a significant role in the decline. On a monthly basis, prices saw a 0.3% decrease, reflecting the fourth decline in six months.

Despite these fluctuations, US retail sales demonstrated resilience and growth in May, defying expectations of a decline. The Commerce Department reported a 0.3% increase in retail sales across various outlets, including physical stores, online platforms, and restaurants, compared to April. This positive trend underscores the vital role of consumer spending in fuelling the economy. While gasoline stations and miscellaneous stores experienced a decrease in sales, spending grew in other categories. Excluding gasoline station sales, retail spending showed a stronger increase of 0.6%, with building materials and gardening items experiencing the highest surge of 2.2% in May. Overall, retail sales rose by 1.6% compared to the previous year.

Amid these economic developments, the Federal Reserve made the decision to keep interest rates unchanged, opting to assess the impacts of the previous 10 hikes. The positive inflation data likely helped investors absorb a somewhat hawkish outlook from Fed policymakers. On Wednesday, officials announced that the official federal fund’s target rate would remain steady within the 5.00% to 5.25% range. However, the rate projections indicated by the “dot plot” suggested that this decision was more of a temporary “skip” rather than a long-term “pause,” as the median projection indicated the possibility of two additional quarter-point rate hikes by the end of the year.

The UK economy showed signs of recovery with a 0.2% sequential growth in April, following a contraction of 0.3% in March, driven by increased output in consumer-facing services, car sales, and education. This, combined with stronger-than-expected labour market data, including a 7.2% annual average wage growth and a decline in the unemployment rate to 3.8%, supported market expectations that the Bank of England (BoE) would continue its plan of raising interest rates in July. BoE Governor Andrew Bailey acknowledged the tightness of the labour market and expressed his belief that although inflation would eventually decrease, the process would take longer than initially anticipated.

In the Eurozone, industrial production rebounded more than anticipated in April, showing resilience after a decline in March, according to data released by Eurostat. The surge in output of capital goods, such as buildings and equipment, offset the reduced production of consumer goods. The eurozone experienced a notable 1.0% month-on-month increase in industrial production, resulting in a 0.2% year-on-year rise, surpassing economists’ expectations of 0.8% monthly and annual increases. Notably, capital goods output witnessed a remarkable 14.7% month-on-month increase, reversing the previous month’s 15.2% decline. However, the production of durable consumer goods declined by 2.6%, and non-durable goods saw a 3.0% decrease during the same period.

Concurrently, the European Central Bank (ECB) raised its key deposit rate to 3.5%, reaching its highest level in 22 years. ECB President Christine Lagarde expressed the view that further tightening of borrowing costs may occur in July unless there are significant changes in the economic outlook. The ECB also revised its inflation forecasts upward, supporting the case for continued monetary tightening, while reducing its projections for economic growth. Additionally, as part of its strategy to reduce its balance sheet, the ECB confirmed the cessation of reinvestments from its asset purchase program starting in July.

China’s economy encountered challenges in May as industrial output and retail sales growth fell short of expectations, further raising concerns about the stability of the post-pandemic recovery. The slowdown in economic momentum during the second quarter has prompted China’s central bank to implement its first key interest rate cuts in almost a year, indicating the need for additional measures to support the economy. Industrial output grew by 3.5% in May, slower than the previous month and below analysts’ expectations, reflecting manufacturers’ struggles with weak domestic and international demand. Similarly, retail sales, a crucial indicator of consumer confidence, rose by 12.7%, missing forecasts and decelerating compared to April’s growth rate of 18.4%.

US stocks displayed a robust performance during the week, with the S&P 500 Index achieving its longest stretch of daily gains since November 2021 and its strongest weekly performance since the end of March. The tech-heavy Nasdaq surged by +3.25% over the week, while the S&P 500 and the Dow Jones also exhibited significant gains of 2.58% and 1.25% respectively. In Europe, both the Euro Stoxx 50 and FTSE 100 closed the week positively, registering gains of +2.45% and +1.06% respectively. Chinese stocks followed suit, driven by expectations of additional stimulus measures to support industries experiencing a slowdown in the wake of the waning post-pandemic recovery. The Shanghai Composite Index climbed by +1.30%, and the Hang Seng Index saw a notable increase of +3.18%. Meanwhile, Japan’s Nikkei 225 concluded the week on a higher note, recording a weekly market movement of +4.47%. The markets’ upward trajectory, reaching their highest levels in over three decades, was reinforced by the Bank of Japan’s (BoJ’s) decision to maintain its accommodative monetary policy, a widely anticipated move.