#1: Stocks pull back on growth and inflation worries
The major indexes retreated over the shortened trading week—markets were closed on Monday in observance of Labor Day. The small real estate sector led the declines in the S&P 500 Index as longer-term interest rates increased, while consumer staples and utilities stocks held up best. The small-cap Russell 2000 Index fared worst after two consecutive weeks of outperforming the large-cap benchmarks, and value stocks trailed growth shares, although volatility increased, trading volumes remained somewhat subdued, in part because of the week’s religious holidays.
#2: Biden’s stimulus plan faces new hurdles as federal debt ceiling looms
Political uncertainty may also have been at work. On Wednesday, the website Axios reported that Democratic Senator Joe Manchin backs as little as USD 1 trillion of Biden's USD 3.5 trillion spending plan, highlighting the wide gap between moderates and progressives, although other sources indicated later in the week that Manchin might be willing to go as high as USD 2 trillion.
#3: Producer price data send bond yields higher
The high yield market was also fairly quiet, as concerns over economic growth and the Federal Reserve’s eventual tapering of its monthly asset purchases contributed to a weaker economic backdrop. Our high yield traders noted that the primary calendar was somewhat slow to accelerate following the Labor Day holiday, with new deal announcements expected to pick up steam the following week. Conversely, the investment-grade corporate bond primary calendar was active, with the number of new deals setting a daily record at the start of the short week. Despite a softer macroeconomic backdrop highlighted by weakness in U.S. equities, technical conditions were supported by healthy overnight demand from Asia, and the new issues were well subscribed.
#4: ECB to trim pandemic bond purchases
The ECB said, after its latest policy meeting, that it had decided to move to a “moderately lower pace” of bond purchases under its Pandemic Emergency Purchases Programme for the rest of the year, after a rebound in European growth and inflation. Lagarde said that the central bank was not tapering its stimulus. "What we have done today ... unanimously, is to calibrate the pace of our purchases to deliver on our goal of favourable financing conditions. We have not discussed what comes next," she said.
#5: UK raises taxes; BoE policymakers evenly split in August
UK Prime Minister Boris Johnson secured parliamentary approval for GBP 12 billion in tax increases to fund changes to social care and the National Health Service. Under the plan, some investors will face higher levies on dividends, while the national insurance contributions taken out of paychecks will also increase.BoE Governor Andrew Bailey revealed at a parliamentary hearing that the policy committee was split 4–4 over whether to raise short-term rates from 0.1% in August. However, BoE officials also maintained that some modest tightening was likely over the forecast horizon.
#6: Japan: BoJ governor says rates will stay low even if fiscal policy becomes more expansionaryWith markets expecting further fiscal stimulus under a new prime minister, the Bank of Japan (BoJ) Governor Haruhiko Kuroda said, in an interview with Nikkei, that rates will remain low to enhance the effect of fiscal policy. He does not expect additional fiscal spending to have a negative impact on markets but added that the BoJ will monitor developments carefully. According to Kuroda, the BoJ will continue with current monetary easing (even after the coronavirus pandemic abates and until the 2% inflation target is reached) and stands ready to take additional easing measures as needed without hesitation.
#7: China: Producer inflation outpaces consumer inflationOn the economic front, inflation data continued to show elevated producer prices and subdued consumer prices, which have been restrained by lower fuel and pork prices. The producer price index (PPI) rose 9.5% in August from a year ago mostly due to higher commodity prices that have been a major driver of factory gate inflation this year. August’s PPI reached a 13-year high, according to Bloomberg. The recent acceleration in China’s PPI is a growing concern for the government since the widening gap between producer and consumer prices could signal pressure on domestic manufacturers’ profit margins.
#8: Small caps stalled
An index of small-cap stocks continued to slip in the latest week, extending a recent run of underperformance versus their large-cap peers. The Russell 2000 Index surged nearly 20% in the first two and a half months of 2021 but has declined nearly 6% since achieving a record high in mid-March.
#9: Value stumbled
While both benchmarks fell for the week, an index of U.S. large-cap growth stocks outperformed a value stock index by a substantial margin for the fourth week in a row. The recent results have moved the growth style back into the performance lead over value year to date.
#10: Price check
A government report scheduled to be released on Tuesday will show whether the recent spike in consumer prices carried over into August. The Consumer Price Index released last month showed that prices surged 5.4% for the 12-month period that ended in July. While high, that figure was in line with expectations and lower than June’s rise on a seasonally adjusted basis.