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US stocks registered their first negative quarter of 2023 on Friday, marking the end of a turbulent period for equities and bonds. Investors are now considering the possibility of prolonged higher interest rates, even as inflationary pressures begin to ease.
On Friday, the S&P 500, the benchmark index for Wall Street, declined by 0.3 percent, capping a 3.7 percent decrease for the quarter. This marked the first negative quarter in 12 months. The Nasdaq Composite, which is heavily focused on technology stocks, rose 0.1 percent on Friday, but experienced a 4.1 percent drop for the quarter. This was its largest quarterly decline since Q2 of 2022.
The decline in US stocks coincides with the drop in US core personal consumption expenditures from 4.3 percent in July to 3.9 percent in August, the lowest level in almost two years. Policymakers closely monitor this inflation gauge.
“Inflation is continuing to decelerate, indicating the effectiveness of the Fed’s aggressive campaign,” said Carol Schleif, chief investment officer at BMO Family Office. “However, core PCE remains double the Fed’s 2 percent target, which keeps the possibility of another rate hike open.”
John Williams, president of the Fed’s New York branch, stated that the central bank is nearing the peak of its monetary tightening. He expects inflation to moderate to 2.5 percent in 2024. However, the recent release of the Fed’s “dot plot” of interest rate estimates suggests fewer rate cuts in 2024 and 2025.
The benchmark 10-year US Treasury yield, which reached its highest level since 2007 earlier this week, experienced a slight drop to 4.58 percent on Friday. Yields were at 4.09 percent at the end of August.
The two-year Treasury yield, which is influenced by interest rate expectations, slightly increased after the inflation data but remained lower at 5.05 percent. Bond prices move inversely to yields.
Investors are keeping an eye on developments in Washington as lawmakers seek to reach a deal to avoid a government shutdown. A shutdown would halt the publication of federal economic data and could potentially threaten the country’s triple A credit rating.
In Europe, the Stoxx 600 index rose by 0.4 percent, mirroring gains in Germany’s Dax and the FTSE 100 in London. France’s CAC 40 index also experienced a 0.3 percent increase.
Yields on European sovereign debt slid following data that indicated a decrease in the eurozone’s harmonized index of consumer prices. The index fell from 5.2 percent in August to 4.3 percent in September. Core inflation, which excludes energy and food, also declined to 4.5 percent from 5.3 percent in the previous month.
Italian 10-year government bond yields dropped 0.17 percentage points to 4.75 percent, while German 10-year bond yields decreased by 0.14 percentage points to 2.82 percent. Both bond yields had reached their highest levels in a decade earlier in the week.
Despite expectations of a slowdown in inflation, the market is grappling with the possibility of prolonged high interest rates. Additionally, the impact of rising oil prices, which have increased by 35 percent in the last two months due to decreased global output, is being taken into account.
Brent crude futures settled slightly lower at $95.31 a barrel, while the US benchmark WTI contract dropped 1 percent to $90.79.
Chinese tech stocks experienced a surge on Friday after the country’s top internet regulator released a draft rule simplifying cross-border data transfers.
Hong Kong’s Hang Seng index rose 2.5 percent, and the Hang Seng Tech index, which tracks the top-30 technology companies, climbed 3.8 percent.
Internet companies Tencent and Alibaba saw gains of 3 percent and 1.5 percent respectively, while electric vehicle start-up Xpeng increased by 4.7 percent. Mainland China’s markets were closed for a holiday.
Additional reporting by Gloria Li in Hong Kong
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