US stocks endure first monthly drop since February

US stocks were mixed on Thursday, but notched their first monthly drop since February despite solid economic data feeding hopes that the Federal Reserve will probably refrain from raising interest rates again this year.

Wall Street’s benchmark S&P 500 gave up its earlier gains to close 0.2 per cent lower, bringing its loss for the month to 1.8 per cent.

The Nasdaq Composite, which is dominated by fast-growing tech stocks that are particularly vulnerable to higher interest rates, added 0.1 per cent. However, it was the index’s worst month since December.

Government bond prices also rose slightly. The yield on the policy-sensitive two-year Treasury dipped 0.03 percentage points to 4.86 per cent. Yields fall when prices rise.

Thursday’s market moves followed the release in the morning of the Bureau of Economic Analysis’s personal consumption expenditure report, which showed measures of inflation ticked up as expected in July and that consumers increased their spending.

The “core” PCE index — an inflation gauge closely watched by economists and policymakers that strips out volatile items — rose slightly in July to an annualised rate of 4.2 per cent, up from an almost two-year low in June. The move was in line with economists’ forecasts and the month-on-month increase of 0.2 per cent suggested price pressures were continuing to moderate.

“Over time, that sort of figure will get annual inflation trending down to 2 per cent quite happily”, said James Knightley, chief international economist at ING, referring to the rate targeted by the Fed.

The BEA’s report also showed household spending rose 0.8 per cent in July, a sign that the US economy remains relatively robust in the high interest rate environment.

Together, the figures left traders betting that the Fed would keep its benchmark interest rate steady at its next policy meeting in September.

The US dollar added 0.5 per cent against a basket of six peer currencies. The advance came largely at the expense of the euro, which was down 0.7 per cent as investors hoped that moderating core inflation in the eurozone would reduce the chance of further interest rate rises from the European Central Bank despite disappointing headline figures.

Michael Metcalfe, head of macro strategy at State Street Global Markets, said: “The headline does matter because it obviously does feed through into inflation expectations, but the detail of the report was more reassuring, because it does suggest that we’ve seen a peak in core inflation in the euro area now.”

Traders priced in a 70 per cent chance that the ECB would keep rates steady next month, up from about 57 per cent earlier in the day, according to data compiled by Refinitiv and based on interest rate derivatives prices.

In government debt markets, the yields on the policy-sensitive two-year German Bund fell 0.1 percentage points to 2.96 per cent, while yields on the 10-year Bund, a regional benchmark in Europe, declined 0.07 percentage points to 2.46 per cent.

The region-wide Stoxx Europe 600 index lost momentum from earlier in the day to close down 0.2 per cent, while France’s CAC 40 fell about two-thirds of 1 per cent and London’s FTSE declined 0.5 per cent.

However, the region’s financial stocks were boosted by news that UBS reported the largest-ever quarterly profit for a bank. Its shares rose 6.1 per cent, while the Stoxx 600 Europe Financial Services index rose 1.5 per cent.

Chinese stocks were led lower by a weak property sector on Thursday, after Country Garden, once the country’s largest private developer by sales, reported record losses. China’s CSI 300 and Hong Kong’s Hang Seng both fell 0.6 per cent.

The CSI 300 Real Estate index, which tracks property stocks listed on mainland exchanges, declined 5.3 per cent. Hong Kong’s Hang Seng Mainland Properties index lost 1.9 per cent, erasing early gains.

The country’s equity markets were also hit by weak data on factory activity, with the official manufacturing purchasing managers’ index coming in at 49.7 for the month, below the neutral 50 mark that indicates a contraction.