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LGT Navigator: Record high inflation in the euro zone intensifies interest rate fears on markets

September 1, 2022

After an attempt at recovery, stock exchanges turned back into the red in midweek, and indices in Europe, on Wall Street and today also in Asia continued their downward slide. The background to this, particularly in Europe, was the latest data on inflation, which underscored fears of a further acceleration in inflation. As a result, the yield on two-year German government bonds climbed at times to over 1.2%, marking the biggest monthly jump in August for a good 40 years.

Record-high inflation in the eurozone intensifies interest rate fears

The EuroStoxx 50 lost -1.25% and ended the month at a level of 3'517.25, meaning that the European benchmark lost more than five percent in the month of August. At the same time, against the backdrop of high inflation, German government bond yields rose in August by the most in decades.  The yield on two-year Bunds rose by around 85 basis points in August, the sharpest increase since 1981!

In New York, stock indices were also unable to escape downward pressure at the end of the month, posting losses once again. The Dow Jones Industrial fell by -0.88% to 31'510.43 points on Wednesday, registering the fourth consecutive day of losses and a decline of -4% for the month. The S&P 500 slipped -0.78% yesterday to exit trading at 3'955.00 points. On the Nasdaq, the indices lost about -0.6%. The yield of ten-year US government bonds is currently holding just below 3.2%. 

While in Europe above all the fear of a massive energy crisis unsettles investors, in the US reverberates above all the statements of Fed Chairman Powell at the Jackson Hole central bank symposium, where the Fed Chairman reaffirmed the prospect of further strong interest rate steps. The focus of interest is now the labor market report from the US tomorrow Friday, which is one of the decisive factors for the further direction of US monetary policy.

Stocks in the Asia-Pacific region traded mostly lower on Thursday. Japan's Nikkei 225 slipped -1.8% and Hong Kong's Hang Seng trades around -1.5% lower. South Korea's Kospi is down about -1.8% and in Australia, the S&P/ASX 200 briefly fell more than -2%. On the Chinese mainland, the Shanghai Composite gained about +0.25% after a negative start to trading. The broadest MSCI index for the Asia-Pacific region outside Japan lost about -1.6%. Among other things, a Covid-19-related lockdown in the southwestern Chinese metropolis of Chengdu caused a stir.

Inflation in the eurozone from record high to record high

The cost of living in the euro countries rose by an average of +9.1% year-on-year in August, once again recording an all-time high in the history of the euro zone. Analysts had expected an increase from +8.9% in July to +9.0%. The main driver remains the sharp rise in energy prices, which have increased by almost +40% over the year. However, food and beverages as well as services also became more expensive. Excluding the often-volatile energy and food prices, the core rate in August was +4.3%, compared with +4.0% in the previous month. The highest inflation rate was recorded in Estonia at around +25%.

Decisive action required from the ECB

The European Central Bank (ECB) is thus under increasing pressure to send a clear signal in the fight against inflation on September 8 with a significant increase in the key interest rate, probably by 75 basis points. The head of the Bundesbank, Joachim Nagel, once again called for a substantial interest rate hike in September and further interest rate steps in the following months. He said there was a risk that the phase of high inflation would continue for longer and that the current wave of inflation would only subside slowly. The ECB Governing Council must act decisively at its next meeting to fight inflation, otherwise inflation expectations could become permanently entrenched above the two percent target, the president of the German central bank warned.

The euro benefited from the prospect of a possibly strong interest rate move by the ECB and disappointing American labor market data from ADP. The common currency was able to hold just above parity against the US dollar.

Slowed employment momentum in the US private sector

According to the latest data from the labor market services provider ADP, “only” 132'000 new jobs were created in the US private sector in August. Analysts had expected an increase of 300,000 jobs. In July, the job growth still amounted to 270'000. The ADP report is considered an indicator for the monthly labor market data from Washington, which will be published on Friday. However, a strong increase in the data on wage development, published for the first time by ADP, is more likely to provide “fuel for the fire”. According to this, the salaries of the surveyed companies have increased in August compared to a year ago by an average of +7.6%.

Economic Indicators September 1

MEZ Country Indicator Last period
08:00 GE Retail Sales (July, m/m) -1.6%
08:30 SZ Consumer Prices (August, y/y) +3.4%
09:15 ES PMI Manufacturing (August) 48.5
09:30 SZ PMI Manufacturing (August) 58.0
09:45 IT PMI Manufacturing (August) 48.5
09:50 FR PMI Manufacturing (August) 49.0
09:55 GE PMI Manufacturing (August) 49.8
10:00 EZ PMI Manufacturing (August) 49.7
10:30 UK PMI Manufacturing (August) 46.0
11:00 IT GDP Q2 (q/q) +1.0%
11:00 EZ Unemployment Rate (July) 6.6%
14:30 US Productivity Non-Farm Q2 (q/q) -4.6%
14:30 US Initial Jobless Claims (weekly) 243,000
15:45 US PMI Manufacturing (August) 51.3
16:00 US ISM Manufacturing (August) 52.8


Earnings Calender September 1

Country Company Period
FR Pernod Ricard Annual
US Broadcom Q3


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