Week ending 9th August 2024.

This week’s market performance was characterised by a significant sell-off followed by a strong recovery, with many of the earlier losses being recouped. One of the key factors behind the initial downturn was the unwinding of the Japanese yen carry trade—a strategy where investors borrow yen to invest in higher-yielding assets like stocks and bonds. This trade has been popular in recent years due to Japan’s low interest rates, which kept the yen relatively cheap compared to the US dollar. However, this dynamic shifted last Wednesday when the Bank of Japan raised interest rates for the second time this year, leading to a stronger yen.

Earlier in the week the S&P 500 experienced a decline, nearing correction territory. However, the index managed to recover much of its losses, even achieving one of its best single-day gains since November 2022 on Thursday, and ultimately closed the week only modestly lower. This recent bout of volatility highlights how short-term market fluctuations can be intense and unsettling, but they are often temporary.

While this week was relatively quiet on the economic data front, the information that did come through played a significant role in stabilising markets. Weaker-than-expected labour market data had initially led some to believe the Federal Reserve was falling behind in its response, contributing to the recent sell-off. Investors paid greater attention to Weekly Jobless Claims this week which fell by 17,000 to 230,000 for the week ending August 3rd, easing fears of a rapid deterioration in the labour market. Notably, year-to-date, the S&P 500’s total return stands at nearly 12%, and the US economy expanded by 2.8% in Q2, up from 1.4% in Q1 2024—indications that there doesn’t appear to be a broader slowdown in any sense.

With the Federal Reserve’s next monetary policy decision not until September 18th, investors are likely to turn their attention to the upcoming Jackson Hole Economic Symposium. This event, where economists, financial market participants, academics, U.S. government representatives, and media will gather to discuss central banking policy issues, could provide valuable insights. Federal Reserve Chair Jay Powell may offer much needed clarity on the future path of interest rates, which could further ease investor concerns.

In China, inflation rose faster than expected in July, with the Consumer Price Index (CPI) hitting a five-month high of 0.5% year-on-year, compared to 0.2% in June. This increase, driven partly by weather disruptions affecting food supplies, has injected some optimism into the market. China’s market has remained relatively insulated from global market noise, with the Hang Seng closing the week up 0.85%. This further emphasises the value of maintaining a diversified portfolio.

On the production front, Irish manufacturing industries saw a 4.6% decrease in output in June compared to May. However, despite this monthly decline, production increased by 6.2% over the three months from April to June compared to the previous three-month period.

Overall, while markets have been choppy, the underlying fundamentals remain strong, and recent developments have provided some stability. Looking ahead, next week brings a series of key economic reports, including the U.S. Producer Price Index (PPI), retail sales, and inflation rates, as well as UK retail sales, inflation data, and preliminary GDP estimates for Q2. Additionally, China’s industrial production and retail sales data will also be closely watched.

Kate Mimnagh, Portfolio Economist

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