Macro Insights

August 2023 Wrap-up: Global bond sell-off dents valuations

4 September 2023

Author: Griffin Tory

The month of August saw US long-term interest rates hit a 16-year high, which exerted downward pressure on asset valuations globally. The proximate driver of these moves appeared to be strong US economic data, with elevated readings for industrial production, retail sales and housing activity pushing the Atlanta Federal Reserve’s Q3 GDP nowcast to 5.6% (QoQ, % Ann.). These developments saw the market price higher long-run policy rates. Federal Reserve Chair Powell seemed to validate these expectations at his Jackson Hole Symposium speech, where he noted that, despite the progress made on taming price pressures, policy will remain tight until inflation has stabilised at the 2% target.

Towards the end of the month, survey data pointed to a deterioration in economic activity across Europe. This was particularly acute in Germany, where Fulcrum’s nowcast of current economic activity moved further into contraction territory. A slowing Chinese economy also weighed on growth sentiment, as China continued to suffer from a property-led slowdown as well as weak demand from both domestic and global consumers. Moreover, Chinese authorities appeared reluctant to embark on major stimulus efforts, which further compounded market pessimism. The US also saw weaker job vacancies data towards the end of the month, which coincided with a partial retrenchment in long-term yields.

Against this backdrop, global equities were down -2.8%¹ in August. Emerging markets saw greater declines than their developed market counterparts, given their higher sensitivity to US financial conditions as well as the weakness emanating from China. Global bonds also saw declines of -1.4%², led entirely by interest-rate movements as credit spreads remained accommodative. The appeal of higher long-term real interest rates in the US caused a significant rally in the US dollar. Global commodities were little changed, as a rally in energy prices outweighed declines in metals and agricultural commodities.

Source: Bloomberg

About the Author

Griffin Tory

Griffin Tory is a Junior Economist working within the Macro Research team. Griffin joined Fulcrum in 2022 and prior to this, worked in the Investment Strategy Group at Vanguard. He graduated with an MPhil in Economics from the University of Cambridge in 2020.

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