Stocks head for worst monthly slide this year

Global equities nudged higher on Wednesday, boosted by evidence that inflation is gradually subsiding, but were still set to end August with their worst monthly loss of 2023 so far.

MSCI’s broadest index of global shares touched its highest level in over two weeks following a rally in Asia, where equities continued to benefit from Chinese measures to boost investment in its beaten-down stock market, and from weak U.S jobs data on Tuesday.

A report on U.S. private sector employment showed the economy generated fewer jobs than expected in August, marking the latest indication that the labour market is losing steam. This, in theory, could take some pressure off the Federal Reserve to keep raising rates.

In Europe, data showed German consumer prices rose by 6.4% in the year to August, above expectations for a rise of 6.3%, but below July’s 6.5% rate.

The STOXX 600 was mostly flat on the day, having traded in negative territory earlier on, as were U.S. stock index futures.

“We’ve taken the pain from inflation and interest rates now,” said Christopher Rossbach, chief investment officer of asset manager J. Stern & Co, in reference to the German inflation data and expectations of a Fed pause.

He said stock and bond markets were now through the worst of central bank rate rise cycles and ready for “broad-based” gains.

U.S. Treasury yields held steady on the day, with the benchmark 10-year note at 4.116%, while German Bund yields rose 3 bps at 2.454%.

The first set of August inflation numbers from Spain and some German states pushed euro zone bond yields higher earlier in the day and led money markets to price in a chance of around 60% of a European Central Bank rate hike in September.

“The ECB doesn’t have growth and it’s still got inflation that seems to be ticking back up,” said Patrick Armstrong, chief investment officer at Plurimi Wealth.

“They almost certainly have to hike again this year because today’s inflation data shows there’s still more work to do.”

The dollar fell 0.4% against a basket of currencies on Wednesday following the ADP National Employment report, which showed U.S. private payrolls rose by 177,000 jobs last month.

Economists polled by Reuters had forecast private employment would increase by 195,000.

Data on Tuesday showed U.S. job openings dropped to their lowest in nearly 2-1/2 years in July, signalling inflation pressures caused in part by a tight labour market were easing.

“The U.S. labour market is moving towards better balance,” SEB Group U.S. economist Elisabet Kopelman said in a note to clients, “increasing prospects for the Fed to achieve a soft landing for the economy.”

Still, MSCI’s global stock gauge has fallen more than 3% in August, thanks to hawkish signals from the Fed’s latest meeting minutes and chair Jerome Powell’s speech on Friday at the Jackson Hole central bankers’ symposium.

INFLATION WATCH

Meanwhile, a clearer picture will form this week of whether hawkish Fed signals that shook markets in August were overdone, with U.S. payrolls and personal consumption expenditure reports due.

Market pricing suggests the Fed will hold rates next month. The odds of another pause at the central bank’s November meeting have risen to 51% from 38% earlier this week.

The headline rate of U.S. inflation, at 3.2% for the 12 months to July, is also trending closer to the Fed’s target of around 2% after the world’s most influential central bank hiked rates by 525 basis points (bps) since March 2022.

The dollar, meanwhile, is still on course for a 1.3% gain in August, its biggest monthly rise since May. The euro rose 0.3% to $1.0915, while the yen eased 0.1% to 1445.94 per dollar, but remained near levels that led to intervention in the currency market last year by Japanese authorities.

Oil prices rose after industry data showed a large draw in crude inventories in the United States, the world’s biggest fuel consumer, and as a hurricane in the Gulf of Mexico kept investors on edge. Brent crude futures rose 0.3% to $85.76 a barrel.