The markets fell last week. Did the TPP traders BUY back in? Find out in our 'recap of the week'.

The FTSE once again fared better than most last week but still dropped -0.36%.

The Bank of England paused its historic interest?rate hiking campaign?for the first time in nearly two years Thursday after inflation fell unexpectedly in August.

The decision keeps the main borrowing cost for commercial banks in the United Kingdom at 5.25% — still the highest level since February 2008 following the longest-running series of successive increases in benchmark interest rates in at least a century. The Federal Reserve also kept rates on hold?Wednesday, as did Switzerland’s central bank earlier on Thursday.

The news will provide some relief to UK households struggling to make?mortgage repayments and could lead to cuts in mortgage rates in the weeks ahead.

The decision to pause came down to a knife-edge vote. Five members of the Bank of England’s monetary policy committee supported maintaining the current rate, while four members preferred to increase it by a quarter of a percentage point to 5.5%.

The central bank did not rule out further rate increases, however, and hinted that borrowing costs would need to be kept high for a prolonged period to ensure a sustained fall in inflation. Having said that, this is pretty standard script for all the central banks at the moment. Saying anything else just wouldn’t be a good idea.

“Inflation is still not where it needs to be and there is absolutely no room for complacency,” Governor Andrew Bailey said in a?video?posted to the bank’s?website. “We’ll be watching closely to see if further increases are needed. And we will need to keep interest rates high enough for long enough to ensure that we get the job done.”

Despite this hawkish tone, many analysts expect no more hikes.

“The bank’s job is done,” said Paul Dales, chief UK economist at Capital Economics. But he added that rates would stay at their current level for longer than investors expect.

UK mortgage rates have eased over the past few weeks, although remain well above their level a year ago. The cost of the average two-year fixed-rate mortgage was 6.58% on Thursday, according to financial product comparison website Moneyfacts. That compares with a rate of 4.24% last September and just 2.38% in September 2021.

Core inflation, which strips out volatile food and energy costs, and services inflation also slowed sharply, signalling an “inflexion point has been reached in underlying inflation,” according to Martin Beck, chief economic adviser to the EY ITEM Club.

A recent slowdown in UK economic activity and signs that the job market is weakening could drag inflation down further.

After increasing slightly in the second quarter, gross domestic product shrank 0.5% in July, with output declining in most sectors.

And although wages are still increasing at a record rate, unemployment has ticked up and vacancies have dipped below 1 million for the first time in two years.

Company insolvencies, meanwhile, jumped 19% in August compared with a year earlier to more than 2,300. That’s higher than levels seen while government support measures were in place during the pandemic, and also higher than pre-pandemic numbers.

The pan-European STOXX Europe 600 Index ended 1.98% lower as central banks continue to signal that interest rates will stay high for some time to come. Higher oil prices and poor business activity data also clouded the economic outlook. Major country stock indexes also fell.

France’s CAC 40 declined 2.29%, Germany’s DAX lost 2.26%, and Italy’s FTSE MIB slipped 1.13%.

Eurozone government bond yields increased after European Central Bank officials said another interest rate increase could not be ruled out and after the Fed indicated that rates are likely to remain higher for longer.

However, the move moderated later in the week after the decision by the Bank of England to keep short-term interest rates on hold as well as weak eurozone PMI data. UK gilt yields decreased, with more notable moves at the shorter-maturity end of the yield curve.

The major U.S. equity benchmarks declined for the week as investors reacted to hawkish forecasts from the Federal Reserve’s latest meeting and rising U.S. Treasury yields. The S&P 500 Index recorded its largest one-day loss in six months on Thursday on its way to a third-straight losing week.

As expected, the Fed left its short-term lending benchmark at a target range of 5.25% to 5.50%, the level set at the previous meeting in July, and its updated Summary of Economic Predictions continued to show one more rate hike in 2023.

However, policymakers surprised markets with an outlook for rates in 2024 that was notably higher than expected, and their rate prediction for 2025 also increased. In addition, the central bank raised its growth forecast, an acknowledgement that the economy has been more resilient than expected.

Higher rates for longer led to a tech sell-off that saw Tesla shares drop over 10% over the last 5 trading days. US markets all lost ground this week with the S&P500 falling -2.93% and the Nasdaq 100% losing a total of -3.62%.

Apart from the Fed meeting, it was a relatively light week for economic news. Weekly initial jobless claims came in lower than predicted and fell to the lowest level since January, further reinforcing views that the labour market remains strong.

Japan’s stock markets fell over the week, with the Nikkei Index down 3.4% and the broader TOPIX declining 2.2%. Sentiment was dampened by the Federal Reserve's comments to keep interest rates higher for longer to combat persistent inflation. In contrast, the Bank of Japan matched expectations of no change to its monetary policy, dashing hopes that the central bank would hint at an exit from negative interest rates.

Chinese equities rose as investors grew more optimistic about the country’s economic outlook. The Shanghai Composite Index gained 0.47% while the blue chip CSI 300 Index added 0.81%. In Hong Kong, the benchmark Hang Seng Index declined -0.7%, according to FactSet.

No major indicators were released in China during the week. However, official data for August released the prior week provided evidence of economic stabilization in the country. Industrial production, retail sales, and lending activity rose more than forecast last month from a year earlier, although fixed-asset investment grew less than expected as the drop in property investment worsened.

The week ahead:

It’s not a particularly busy week but US inflation data will take centre stage.

Energy prices and the basing effect have seen the annual rate of US inflation curl higher for a second month, although it is the core measure of inflation that really matters going forward.

The Fed’s preferred measure of inflation is the personal consumption expenditure series (PCE) which is released this week. Core PCE is less volatile than core CPI and has been stickier than its CPI counterpart. And with the Fed having hammered home that high rates are here to stay, it would require an abnormally large miss to the downside for markets to ignore this week’s memo. That means PCE data is unlikely to be a market-mover unless it surprises to the upside to generate fresh bets of another Fed hike.

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Two measures of consumer confidence are also released for the US next week; the Conference Board Consumer Confidence survey and the University of Michigan Survey of Consumers. The two have clearly diverged in since March 2020, with the latter being the more pessimistic and volatile even though it has a smaller sample size of 500 compared with the CB’s 5000, and focuses more on the individual’s state of affairs whereas CB is more about their perception of the economy as a whole.

Both turned lower recently and that is a trend that needs to continue to lessen the likelihood of higher for longer rates. But again, if the bond market continues to plunge and send yields skyrocketing, that could surely have a negative effect on sentiment and the wider economy as a whole.

US retail sales, GDP, jobless claims:?As suggested earlier, bond markets are the main driver in town. And that means second-tier data is even less appealing. With that said, retail sales is a form of consumer sentiment so any notably weak data from the US could at least hint at a cooling economy.

We also have the final US GDP prints on Thursday, although jobless data is released at the same time and that may prove to be the bigger market mover if it prints another strong data set.

Australian inflation, retail sales:?The majority of recent economic data points to a peak RBA rate of 4.1%. Whilst the Fed’s meeting was hawkish, it doesn’t really place any extra pressure on the RBA to hike.

Closing Comments:

After a great week two weeks ago, many traders reduced exposure on the BUY side.?However, over the last couple of days we have witnessed many buying back into the markets as they've fallen.

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