Daily Global Analysis By zForex

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Asia-Pacific Markets Show Mixed Performance Amid China's Factory Contraction, Unemployment Rate Declines in Japan, and UK Housing Market Struggles in July 2023

On Tuesday, the Asia-Pacific markets exhibited mixed performance, triggered by China's factory activity entering contraction territory for the first time since April, as per the Caixin survey by S&P Global. The Purchasing Managers Index (PMI) for July registered at 49.2, falling short of economists' expectations of 50.3, as revealed by Reuters polls. This comes after yesterday's official statistics, indicating China's factory activity contracted for the fourth consecutive month, with a PMI reading of 49.3.
Meanwhile, in Japan, the seasonally adjusted unemployment rate for June decreased to 2.5%, slightly below the previous month's 2.6%, aligning with economists' predictions based on government data. Additionally, Japan's jobs to applicants ratio for June stood at 1.3, slightly lower than the Reuters forecast of 1.32.
Contrary to economists' expectations from Reuters polls, the Reserve Bank of Australia decided to maintain rates at 4.1%, instead of implementing a 25 basis points hike.
In Europe, several companies, including Euroapi, Uniper, Daimler Truck, DHL Deutsche Post, Covestro, BP, HSBC, Travis Perkins, and Diageo, are expected to release their earnings reports. Additionally, Eurozone unemployment data will be published.
In the United Kingdom, the Nationwide House Price Index for July 2023 experienced a notable decline of 3.8% compared to the previous year, accelerating from the 3.5% decrease observed in June, marking the largest fall in house prices since July 2009. This decrease in housing prices is attributed to subdued housing market activity due to stretched housing affordability for prospective homebuyers with mortgages.
Throughout the day, PMI updates will continue, encompassing figures from the Eurozone, including Germany, as well as from the UK and the US.​
Central Banks' Moves and Economic Indicators: Japan's Policy Adjustment, New Zealand's Rising Unemployment, and Fitch's Rating Cut

The Bank of Japan has pushed back on speculation its recent policy adjustment marked the start of a tightening cycle.
Deputy Governor Shinichi Ichida on Wednesday reiterated the central bank’s flexible threshold for tolerance on long-term bond yields is merely a necessary modification to sustain its ultra-easy monetary policy position.
New Zealand’s unemployment rate increased to 3.6% in the second quarter, up from the 3.4% in the first quarter and higher than the 3.5% expected in a Reuters poll.
Most notably, job growth climbed 1% quarter on quarter, sharply higher than Reuters forecast of 0.5%.
Fitch Ratings cut the United States’ long-term foreign currency issuer default rating to AA+ from AAA on Tuesday, citing an erosion of governance and expected fiscal deterioration over the next three years.
In particular, the agency called out brinksmanship in Washington around debt ceiling negotiations earlier this year
Service Sector Growth in China, Bank of England's Rate Hike Expectations, and Global Stock Market Performance

In July, China's service sector activity showed a stronger expansion, as indicated by the Caixin survey compiled by S&P Global. The service sector purchasing managers index reached 54.1, slightly up from June's 53.9. The survey report attributes this growth to a solid rise in business activity across the sector and a significant increase in overall new business, leading to six consecutive months of firms expanding their payroll numbers
In June, Australia's trade surplus declined to 11.3 billion Australian dollars ($7.4 billion) from May's AU$11.7 billion.
Private payrolls data showed that US companies added 324,000 workers last month, surpassing the consensus forecast of 190,000. In addition, investors reacted to news that the Treasury will issue $103 billion of securities next week, slightly more than forecast, and this comes shortly after Fitch Ratings' downgrade of the US.
The Bank of England (BOE) is considering a 25-basis point hike after last month's inflation rate showed some improvement, sitting at 7.9%, down from 8.7% in May. Despite the BOE's divergent stance from other central banks, high inflation levels and mixed labor and wage data may cause market apprehension about any unexpected moves similar to the half-point curve ball thrown at their previous meeting.
Reuters Graphics
Global Economic Insights: Inflation Trends, Market Volatility, and Monetary Policy Perspectives

Tokyo's core inflation rate, an indicator of price stability, showed a decrease to 2.8% from July's 3%, falling below the anticipated 2.9% forecasted by economists surveyed by Reuters. This marks the slowest growth in the city's core inflation since September 2022. The metric excludes volatile fresh food prices from the consumer price index.
Despite efforts by policymakers to stabilize the struggling Chinese stock market through major financial institutions, investor pessimism persists, leading to a decline in Chinese stocks. Additional policy measures were introduced, including relaxed mortgage policies, as reported by the official Xinhua news agency.
Philadelphia Federal Reserve President Patrick Harker expressed a view that further interest rate hikes may not be necessary, with potential rate cuts in 2024 depending on economic data. Harker highlighted feedback from business leaders in his district, who suggest that the Federal Reserve should maintain its current stance to allow the impact of previous rate increases to permeate the economy.
The German economy remained stagnant in the second quarter, as confirmed by the Federal Statistics Office. The GDP recorded no growth from the previous quarter when the country experienced a winter recession.
Market participants are closely watching the annual gathering of prominent central bankers in Jackson Hole, Wyoming. Federal Reserve Chair Jerome Powell's scheduled speech is anticipated to outline the criteria for assessing potential rate adjustments, both upward and downward, based on evolving economic conditions. Powell's address is expected to shed light on the Fed's future policy directions..
Asia's Economic Reports, Central Bank Actions, and Gold's Rise with the New Data

Shares in Asia experienced fluctuations as investors processed the latest economic reports from China. In August, consumer spending rebounded after a lackluster July, as indicated by the China Beige Book's survey of Chinese businesses released on Thursday. The survey, conducted from August 17 to 25 with responses from 1,300 businesses (mostly non-state-owned), revealed these findings.
While China's factory activity contracted for the fifth consecutive month, the official manufacturing purchasing managers index for August stood at 49.7. This contraction was milder than the anticipated 49.4 predicted by economists polled by Reuters, as well as the 49.3 reported in July. Simultaneously, the non-manufacturing PMI weakened for the fifth straight month, dropping to 51.0 from July's 51.5. However, the composite PMI showed improvement, reaching 51.3, marking its first increase in four months.
These indications of China's weakness were met with further signs of official support. The People’s Bank of China engaged with lenders and private businesses to enhance funding access. Additionally, two major Chinese cities lowered mortgage requirements for select homebuyers in response to central government guidance. This move sparked expectations of similar measures to counteract a notable housing slowdown.
In Japan, retail sales exceeded expectations in July, rising by 6.8% year-on-year. This growth is the highest recorded since the 8.2% surge in May 2021, excluding the 7.2% increase in March.
European markets are set to open higher on Thursday, buoyed by UBS's robust performance after acquiring Credit Suisse. UBS reported a second-quarter profit of $28.88 billion, surpassing analysts' projections of $12.8 billion polled by Reuters.
Turning to the US, the ADP private payrolls report revealed a slower-than-anticipated job growth in August. Private employers added 177,000 jobs during the month, a significant drop from the revised total of 371,000 jobs added in July.
US gross domestic product (GDP) exhibited a 2.1% annualized growth rate in the second quarter, lower than the government's previous estimate. These less-than-stellar US economic indicators further supported predictions of the Federal Reserve scaling back on interest-rate hikes. Swap contracts currently reflect a probability of less than 50% for another quarter-point increase within the year.
Evergrande Soars, Yen's Slide, GDP Surprises, and Oil Price Impact

On Wednesday, Evergrande, a Chinese property developer, saw its shares surge by an impressive 82.86%, leading the gains on the Hang Seng Index. Additionally, other stocks like Country Garden Holdings and Logan Group also experienced significant increases in their share prices, with gains of 21.78% and 27.71%, respectively. Meanwhile, the Hang Seng Mainland Property Index showed a rise of approximately 4%.
China's state-owned Securities Times newspaper published an editorial on Wednesday, urging the swift removal of "policies that restrict property purchases in cities outside the hottest top-tier cities."
In response to the yen's decline to a 10-month low against the dollar, Masato Kanda, Japan's vice minister of finance for international affairs, warned that Japan would explore all options if speculative movements against the yen continued.
Australia's gross domestic product (GDP) expanded by 2.1% in the second quarter compared to the previous year, surpassing economists' expectations of 1.8%. However, this figure was slightly lower than the 2.3% year-on-year growth recorded in the first quarter. On a quarter-on-quarter basis, GDP showed a 0.4% increase, marking the seventh consecutive quarterly rise.
In Germany, new manufacturing orders experienced a significant decline in July, with a month-on-month drop of 11.7% and a year-on-year decrease of 10.5%, according to provisional Destatis figures released on Wednesday. This followed the confirmed figures for June, which showed a 7.6% monthly rise and a 3.3% annual increase. The substantial fluctuations in new orders observed in previous months persisted in July 2023.
The rise in oil prices on Tuesday had a negative impact on airline and cruise stocks during early trading. American Airlines, United Airlines, Delta Air Lines, and Royal Caribbean all saw declines of over 1%, while Carnival's stock dropped by approximately 3%. Meanwhile, oil prices increased by more than 1%, and the S&P 500's energy sector gained 1% in early morning trading. Saudi Arabia announced an extension of its production cut of 1 million barrels per day until the end of December, and Russia disclosed plans to reduce its oil exports by 300,000 barrels per day.
China's Credit Trends, Central Banks, and Inflation Prospects

China has witnessed an improvement in credit demand and a reduction in deflationary pressures, suggesting positive signs for both its economy and financial markets. This development has boosted optimism in European stocks and US futures, as it hints at China's economic stability and expectations that the US can manage inflation without harming growth.
In the midst of China's economic challenges, Country Garden, the country's largest private developer, faces a series of creditor votes, attempting to avoid default by extending debt repayments to onshore creditors over three years.
Meanwhile, the yen strengthened by over 1% against the US dollar after BOJ Governor Kazuo Ueda suggested that there might be enough information by year-end to assess wage growth, a crucial factor in determining the Bank of Japan's monetary policy adjustments.
Although Europe had a slow start, the focus this week centers on monetary policy decisions. The ECB is set to announce its rates on Thursday, with expectations of a potential rate hike, driven by hawkish comments from officials and rising crude oil prices.
The Bank of England's announcement is scheduled for September 21, following the Fed. BOE chief economist Huw Pill is addressing the situation today, paving the way for British jobs data on Tuesday and GDP figures on the following day.
Regarding the Federal Reserve, officials have conveyed a clear message lately – they are not eager to raise rates this month but remain cautious about inflation. Investors are eagerly awaiting key US inflation data, including the consumer price index on Wednesday and the producer price index on Thursday.
US Treasury Secretary Janet Yellen has expressed growing confidence that the US can manage inflation without causing significant harm to the job market.
Asia's Stock Fluctuations, European Optimism, and Key Economic Events Ahead

Stocks in Asia fluctuated and Chinese shares were back in the red. Gains triggered by news on Country Garden Holdings Co. — which secured payment extension approval from its bondholders — were not enough to keep the positive sentiment going for long.
European stock markets are poised to open higher on Tuesday, extending the positive momentum from the previous session. This comes as we enter a busy week for economic data.
Taiwan Semiconductor Manufacturing Corp saw a 1.6% increase in its shares following a deal between Apple and Qualcomm. Qualcomm will supply 5G chips to Apple until at least 2026.
TSMC is a manufacturer of both Qualcomm's chips and Apple's chips, which power its devices.
Bank of Japan boss Kazuo Ueda's weekend comments that the end of stimulus is possible during 2023 is still reverberating in the local bond market, with the benchmark 10-year yield pushing to a new near-decade peak.
In the May to June period, the UK unemployment rate rose by 0.5 percentage points to 4.3%, in line with expectations.
The annual growth in employees' average total pay, including bonuses, reached 8.5%, influenced by one-off payments in June and July 2023 from the NHS and Civil Service.
Notably, annual growth in pay, excluding bonuses, remained stable at 7.8%, marking a record high. Overnight, BOE uber-hawk Catherine Mann warned it's too soon to stop raising rates.
Germany’s economic recovery is in the spotlight as well with the release of the ZEW survey, with sentiment likely weighed down by tighter monetary conditions.
The focus shifts to US inflation data, with the consumer price index figures scheduled for Wednesday and the producer price index for Thursday.
Additionally, China will release a plethora of data on Friday, encompassing house prices, industrial production, retail sales, and unemployment.
Global Markets Brace for US Inflation Data with Rising Oil Prices and Economic Indicators

Asian markets declined following a shaky performance on Wall Street as investors awaited crucial US inflation data, all while concerns grew over rising oil prices and their impact on ongoing inflationary pressures, complicating the outlook for interest rates.
In Japan, the corporate goods price index for August saw a 3.2% year-on-year increase, slightly lower than the revised figure of 3.4% in July. This index reflects the prices charged by Japanese companies when trading with each other. Moreover, corporate sentiment in Japan took a hit in September, with both large manufacturers and non-manufacturers showing diminished optimism.
Meanwhile, the UK experienced a 0.5% drop in gross domestic product in July, falling below the 0.2% contraction predicted by economists in a Reuters poll. The Office for National Statistics attributed this decline primarily to a 0.5% drop in services output. However, the economy outperformed expectations for the second quarter, with the ONS confirming 0.2% growth.
Market sentiment is shifting towards expectations of a quarter-point interest rate hike by the European Central Bank (ECB) due to ongoing concerns about high inflation in the region. Money markets now indicate a 70% probability of a rate increase, up significantly from just 20% earlier in the month. This change in outlook is driven by reports suggesting that the ECB's forthcoming economic forecasts will project inflation exceeding 3% in 2024, reinforcing the case for further tightening.
Economists are estimating a 3.6% year-over-year increase in US inflation, according to Dow Jones. This would represent an uptick from the previous month's reading of 3.2%. Additionally, the core consumer price index, which excludes food and energy costs, is expected to show a 4.3% rise in August, down slightly from the 4.7% gain observed in July.
August Inflation Surge: Implications for U.S. Economic Policy

In August, inflation in the United States saw its most significant monthly increase of the year, primarily due to higher energy prices and various other goods. The Consumer Price Index (CPI), which measures the cost of a wide range of products and services, increased by 0.6% for the month, marking a 3.7% rise from the previous year, as reported by the U.S. Department of Labor. Economists had anticipated a 0.6% monthly increase and a 3.6% yearly increase.
When excluding the volatile categories of food and energy, the core CPI rose by 0.3% for the month and 4.3% year-on-year, surpassing estimates of 0.2% and 4.3%. The Federal Reserve often focuses on the core CPI as it provides a more reliable long-term indicator of inflation trends.
The surge in energy prices played a significant role, with a 5.6% monthly increase, including a 10.6% spike in gasoline prices. Food prices increased by 0.2%, and housing costs, which constitute a substantial portion of the CPI, rose by 0.3%. Within housing, the rent of primary residences increased by 0.5% monthly and 7.8% year-on-year. Owners equivalent rent, a crucial metric measuring what homeowners could charge for rent, increased by 0.4% monthly and 7.3% yearly
In other findings, airfare prices increased by 4.9%, although they were still down by 13.3% compared to the previous year. Used vehicle prices, which significantly contributed to inflation in 2021 and 2022, declined by 1.2% and were 6.6% lower than the previous year. Transportation services increased by 2% for the month.
This data emerges as Federal Reserve officials seek a more long-term strategy to address inflation. After a series of rate hikes that began in March 2022, the central bank has raised its benchmark borrowing rate by 5.25 percentage points in an effort to combat inflation that had reached a more than 40-year high in the summer of 2022. Recent statements from officials indicate a more cautious approach going forward, with a balanced view of risks and a more prudent stance on future rate hikes.
U.S. Inflation Surges, European Central Bank Decision Awaited, and Arm's Debut on Wall Street.

Despite August's US inflation being higher than expected at 3.7% (compared to the anticipated 3.6%), most Asia-Pacific markets experienced gains. Meanwhile, European markets opened with a mixed outlook, with investors eagerly anticipating the European Central Bank's upcoming rate decision.
Shares of Arm, the British chip design company founded in 1990, will begin trading in New York on Thursday for the first time after being taken private by SoftBank in 2016. Shares of Japanese investment holding company Softbank slipped slightly on Thursday after subsidiary Arm priced its initial public offering at $51 per share.
In Australia, the unemployment rate remained stable at 3.7% in August, aligning with economist predictions. However, there is uncertainty surrounding the European Central Bank's decision, with economists split on whether it will maintain rates or opt for a 10th consecutive hike, potentially reaching 4%. Market expectations lean towards the latter, although concerns about the economic decline in the Eurozone could sway more dovish ECB members.
Demand for Japanese 20-year bonds at auction was the strongest since May 2020, soothing concerns about a potential normalizing of monetary policy by the Bank of Japan.
The U.S. August inflation data surpassed expectations, largely due to surging oil prices, with the gasoline index being the primary contributor to the monthly rise in the consumer price index (CPI).
The Federal Reserve is unlikely to adjust interest rates at its upcoming meeting on September 20, as markets have already priced in a more than 95% probability of no change. However, the November meeting, being the year's final one, might witness a rate increase if inflation remains elevated. Presently, the market anticipates a cautious stance from the Fed as it monitors inflation.
ECB Raises Interest Rate to Record 4.5% in Fight Against Inflation

The European Central Bank (ECB) has raised its main interest rate for the 10th consecutive time as it prioritizes the battle against inflation over a weakening economy. The rate has now climbed from -0.5% in June 2022 to a record 4.5%. The decision was influenced by revised macroeconomic projections for the euro area, showing higher inflation at 5.6% this year and 3.2% next year. However, the ECB adjusted its medium-term forecast slightly downward to 2.1%.
The ECB suggested that further rate hikes may not be immediate, stating that the current rates would contribute significantly to combating inflation.
This move also increased interest rates on the ECB's main refinancing operations and marginal lending facility to 4.5% and 4.75%, respectively. Economic growth projections for the euro area were lowered for 2023, 2024, and 2025.
While there was uncertainty leading up to this meeting, the majority of governors agreed with the decision. ECB President Christine Lagarde emphasized that future rate decisions would be data-dependent. Headline inflation in the euro area was 5.3% in August, with Germany facing a deteriorating economy. Euro zone business activity also declined to its lowest level since November 2020 in August.
Market focus is now on the ECB's statement language, especially the 2025 inflation forecast and the mention of rates being maintained for a "sufficiently long duration," indicating a flat path for some time to come.

ECB Hike Signals, China's Economic Surge, and Arm Holdings' Strong Debut

European markets were poised for a positive opening on Friday in response to the European Central Bank's indication that their latest interest rate hike could be their last. Simultaneously, global stocks were experiencing a rally.
Meanwhile, oil prices surged to their highest point in 10 months, driven by robust August data on Chinese retail sales and industrial production. Chinese retail sales surpassed expectations by growing 4.6% compared to the previous year, exceeding the Reuters poll forecast of 3%. Similarly, industrial production in August increased by 4.5% year-on-year, surpassing the 3.9% forecast.
Furthermore, industrial production, which also rose by 4.5% in August from the previous year, exceeded both the 3.9% forecast and the 3.7% increase reported for July. The People's Bank of China maintained the interest rate on its one-year medium-term lending facility and injected additional liquidity into the markets via a key policy loan for the 10th consecutive month, following a recent reduction in lenders' reserve requirements.
The European Central Bank raised interest rates by 25 basis points, marking its 10th consecutive rate hike and pushing its main rate to a historic high of 4%. The bank revised its inflation forecasts slightly upward for the current year and the next, projecting rates of 5.6% and 3.2%, respectively. However, it lowered its 2025 inflation forecast from 2.2% to 2.1% and also adjusted its economic growth expectations for the Eurozone downwards.
Notably, a significant development emerged as ECB Governing Council members suggested they do not anticipate further rate hikes at this time, indicating a potential period of stable rates.
In other market news, Arm Holdings Plc had a strong trading debut in New York, with a 25% jump in its stock price. Conversely, Ford Motor Co. and General Motors Co. faced challenges as workers at Detroit carmakers-initiated strikes following the expiration of contract deadlines. Additionally, traders were preparing for the triple witching options event on Friday, which had the potential to cause volume spikes and increased market volatility.
Market Volatility and Central Bank Decisions: A Weekly Overview

Asian-Pacific markets declined on Monday in anticipation of central bank decisions scheduled for the week. Meanwhile, European markets had a negative start to the week.
The troubled Chinese real estate developer Evergrande saw its shares plummet by as much as 22.6% on Monday following the detention of some staff from the group's wealth management unit by the police over the weekend.
There are reports suggesting that the Japanese investment holding company SoftBank is planning to make significant investments, potentially reaching "tens of billions," in the field of artificial intelligence.
Societe Generale SA's stock dropped by more than 7%, significantly impacting Europe's Stoxx 600 Index, as the lender's strategic plan failed to meet investor expectations.
Oil prices continued to rise for the third consecutive day, with Brent crude approaching $95 per barrel due to OPEC+ supply cuts tightening the market. Investors are closely monitoring Saudi Energy Minister Prince Abdulaziz bin Salman's address at an industry conference on Monday for insights into the global oil supply outlook.
The US Federal Reserve is set to announce its decision on Wednesday. While it is widely expected that the central bank will maintain interest rates, investors are keen to discern the Fed's stance on inflation.
In other developments this week, Australia's central bank will release the minutes of its September 5 policy meeting on Tuesday, and the Bank of Japan will conclude its monetary policy meeting on Friday. Additionally, the People's Bank of China is expected to announce its loan prime rate decisions on Friday.
Last week in Europe, the European Central Bank raised interest rates by 25 basis points, marking the 10th consecutive hike and bringing its main rate to a record high of 4%.
China's Steady Loan Rates, UK Inflation, and Fed's Upcoming Policy Update

Across the Asia-Pacific markets, there was a widespread decline in response to China's decision to keep its one-year and five-year loan prime rates unchanged. In contrast, European markets are gearing up for a mixed opening on Wednesday, as global investors eagerly await the upcoming monetary policy announcement from the U.S. Federal Reserve.
Specifically, China has maintained its one-year and five-year loan prime rates at 3.45% and 4.2%, respectively, for the month of September. The People's Bank of China had last reduced the one-year LPR rates in August, lowering them from 3.55% to 3.45%, while the five-year LPR saw its last cut in June, dropping from 4.3% to 4.2%.
Meanwhile, Japan experienced a significant improvement in its trade deficit for August, which plummeted by 66.7% to 930.5 billion yen ($6.3 billion), compared to the 2.79 trillion yen deficit recorded a year earlier.
On the other hand, the United Kingdom observed a 6.7% inflation rate in August, slightly below expectations and a marginal decrease from the previous month. This development may influence the Bank of England's decision to potentially halt its tightening cycle after tomorrow. The likelihood of a quarter-point increase on Thursday has also decreased, with the market assigning it a probability of less than 60%, down from the previous 90%, as indicated by swap pricing.
The Federal Reserve is widely anticipated to maintain its current interest rates on Wednesday. However, market attention will be focused on the central bank's updated economic outlook, including the "dot plot" charting the projected Fed funds rate movements. Chair Powell's subsequent press conference will provide investors with insights into the direction of policy changes leading up to the November meeting and into 2024.
Additionally, Canada has experienced a notable increase in consumer prices, primarily driven by surging gasoline costs. This development might provide supporting evidence for the Federal Reserve to adopt a more restrictive stance on interest rates. Market expectations have roughly doubled the likelihood of a rate hike in Canada, now standing at approximately 40%, following a rise in annual headline inflation from 3.3% in the previous month to 4% in August.
Global Markets React to US Federal Reserve's Rate Decision and Economic Updates

Asia-Pacific markets experienced a decline today as a reaction to the US Federal Reserve's decision to maintain its benchmark policy rate. The central bank also disclosed its intention to raise interest rates once more this year, in accordance with its projections.
These projections indicate that the central bank anticipates raising rates to a median level of 5.6% by the conclusion of 2023, an increase from the current range of 5.25% to 5.5%. Additionally, the Federal Open Market Committee, responsible for rate-setting, projected two rate cuts for 2024, a reduction from its previous June forecast, potentially setting the funds rate at around 5.1%.
On another note, New Zealand's gross domestic product (GDP) showed a stronger-than-expected growth of 0.9% quarter-on-quarter in the second quarter of the year, surpassing economists' expectations of 0.5%. This positive performance followed a revised 0.0% growth rate in the first quarter, preventing the country from slipping into a technical recession. The previous reported figure for Q1 was -0.1%.
In the European markets, there was a downward trend at the opening bell. This comes ahead of a series of interest rate decisions scheduled for Thursday from central banks in England, Turkey, Sweden, Switzerland, and Norway. Additionally, there are preliminary consumer confidence figures for the Eurozone in September set for release.
The Bank of England's announcement marks a busy day for European central bankers. Notably, the Swiss franc depreciated after the Swiss National Bank unexpectedly maintained its rates, while Sweden's Riksbank raised its key rate as anticipated and expressed the possibility of more rate hikes. A decision from Norway's central bank is also on the horizon.
Japan's Economic Landscape: BOJ Policy and Inflation Trends

The Asia-Pacific markets are experiencing mixed performance after the Bank of Japan decided to maintain its current monetary policy in its latest meeting on Friday.
The central bank has kept rates at -0.1% and has set a target for the 10-year Japanese government bond yield at approximately zero. BOJ Governor Kazuo Ueda continues to assert the necessity of an ultra-easy monetary policy until Japan achieves a sustained inflation rate of 2%. Japan's headline inflation has consistently exceeded this target since April 2022, with the latest reading at 3.2% in August. However, Japan's private sector activity has expanded at its slowest pace since February, as indicated by flash estimates from au Jibun Bank, with a September composite purchasing managers index of 51.8, down from August's 52.6. It's worth noting that Japan's headline inflation rate for August was 3.2%, slightly lower than the 3.3% seen in July, marking the 17th consecutive month that inflation has surpassed the Bank of Japan's 2% target. Meanwhile, the core inflation rate, excluding fresh food prices, remained steady at 3.1%, matching July's figure and slightly above the 3% expected by economists polled by Reuters.
In European markets, there is a likelihood of a retreat on Friday due to the emerging prospect of prolonged higher interest rates following a series of central bank decisions this week.
In Great Britain, data published on Friday by the Office for National Statistics reveals a 0.4% increase in the number of goods purchased between July and August, rebounding from a drop in July when inclement weather discouraged shoppers. This growth in August was slightly below the 0.5% expansion forecasted by economists.
On Thursday, both the Bank of England and the Swiss National Bank chose to conclude their recent interest rate hike cycles, though they emphasized the need for continued vigilance and the possibility of further rate increases and sustained higher rates. Additionally, both the Swedish and Norwegian central banks raised interest rates.
Federal Reserve Announces Extended Period of High Interest Rates Amidst Inflation Concerns
The Federal Reserve kept its benchmark interest rate steady, indicating that rates are likely to remain high for an extended period after one more increase later this year. The Federal Open Market Committee, responsible for the US central bank's policy decisions, released a statement after their meeting, stating that they will determine the need for additional policy tightening. Fed Chair Jerome Powell emphasized their willingness to raise rates further until they are confident that inflation is moving towards their 2% target sustainably. The federal funds rate remained in the range of 5.25% to 5.5%, with 12 of 19 officials favoring another rate hike in 2023 to control inflation.
Powell stated their commitment to a restrictive monetary policy to achieve the 2% inflation goal. Fed officials now project a reduction in the federal funds rate to 5.1% by the end of 2024, reflecting renewed economic strength. This rate is expected to fall further to 3.9% by the end of 2025 and 2.9% by the end of 2026. Following the Fed's decision.
The Fed's strategy has shifted to a slower pace of interest rate increases, allowing incoming data to determine the peak interest rate level as inflation moves towards the 2% target. Inflation, excluding food and energy, increased by 4.2% in the 12 months through July. Officials project inflation to fall below 3% next year and return to 2% by 2026. Economic growth is expected to slow to 1.5% in 2024, following an upward revision to 2.1% in 2023.
The projection of higher interest rates for a longer period is influenced by a more optimistic view of unemployment, with the jobless rate expected to reach 4.1% in 2024, compared to the June projection of 4.5%. Powell clarified that a "soft landing" for the US economy is not the Fed's primary expectation, but it remains their primary goal to contain inflation.
Bank of England Halts Aggressive Interest-Rate Hike Cycle Amid Recession Concerns

The Bank of England has paused its aggressive interest-rate hike cycle, due to growing concerns about an impending recession outweighing worry about inflation. After 14 consecutive rate hikes since December 2021 when rates were at 0.1%, the central bank decided to maintain the key rate at 5.25%. The Monetary Policy Committee was split, with five members voting to keep rates steady and four advocating for an increase to 5.5%. Governor Andrew Bailey, holding the deciding vote, opted to maintain the rate.
Although the Bank of England signaled a temporary pause, it emphasized readiness to respond if inflation, currently more than three times above the 2% target, doesn't decrease as expected. Market indicators and many economists are increasingly betting that UK interest rates may have already peaked. This shift in sentiment led to a depreciation of the pound against the dollar. Investors now anticipate minimal further tightening in the coming months.
The decision to halt rate hikes brings relief to households and businesses grappling with rising borrowing costs since the end of 2021. Concerns about the economic outlook played a role in the decision, with data showing a contraction in output, rising unemployment, and declining job vacancies.
The Bank of England has revised its GDP growth forecast downward, and inflation is expected to drop below 2% in the medium term. Higher rates have had a significant impact on homeowners, with a £15 billion repayment burden expected. Some MPC members have cautioned against overtightening, with several voting to maintain rates.
In addition to the rate decision, the Bank of England has accelerated its quantitative tightening efforts to reduce its balance sheet, providing room for potential future financial stability interventions. Over the next 12 months, it plans to reduce its gilt portfolio by £100 billion to £658 billion, adding to last year's unwinding of £80 billion.
Market Insights: Asia-Pacific Mixed, Inflation Updates, and US Government Funding Agreement

The Asia-Pacific markets displayed mixed performance as investors evaluated China's industrial data and Australia's August inflation figures, which were set to be released on Wednesday. In Australia, the weighted inflation rate for August registered a 5.2% year-on-year increase, aligning with economists' expectations polled by Reuters, while the headline inflation stood at 5.5%.

In China, industrial profits saw a year-on-year decline of 11.7% as of August, marking a more moderate contraction compared to the 15.5% drop observed during the first seven months of the year. Meanwhile, concerns in the Chinese property market persisted, exemplified by a third consecutive day of losses for a gauge of Chinese property developers. Cifi Holdings Group Co. shares tumbled after a six-month trading halt, and China Evergrande Group's founder and chairman, Hui Ka Yan, faced police control measures. Country Garden Holdings Co Ltd also confronted impending interest payment deadlines, all against the backdrop of an upcoming holiday that would suspend mainland markets for six trading days.

Turning to Japan, minutes from its monetary policy meeting in July revealed a division within the central bank board regarding the timing of when the Bank of Japan should initiate interest rate hikes. This debate stemmed from inflation consistently exceeding the BOJ's 2% target for 15 consecutive months.

Shifting focus to Europe, Wednesday's market opening was anticipated to be mixed as investors continued to assess factors such as inflation, interest rates, and the global economic outlook.

In the United States, Democratic and Republican leaders reached an agreement on Tuesday to fund the government and provide $6 billion in assistance to Ukraine, effectively averting a potential shutdown on October 1st. However, the plan still faced challenges in the House due to ongoing gridlock.