European markets started the new month on a negative note
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European markets started the new month on a negative note

Stock markets in Europe fell sharply on Thursday, kicking off the new month negatively as investors fretted about the combination of tightening monetary policy and a slowdown in global economic growth. As investors braced for higher US interest rates while Japanese interest rates remained firmly pinned down, the dollar soared to a 24-year high against the Japanese yen.

It was announced earlier Thursday that German retail sales in July were the most considerable increase in six months and had risen 1.9% in real terms, comfortably ahead of analysts' predictions for a further drop of 0.4%.

Sales declined 2.6% from 9.6% in June, which was also ahead of expectations on a year-over-year basis. Nonetheless, this may result from a COVID-free summer tourism season, and German factory activity, a major growth driver in the Eurozone, may have fallen further into contraction territory in August.

It is not only Europe's problem. In the world's second-largest economy and a major regional growth driver, COVID lockdowns and a drought-driven energy crisis continue to weigh on industrial activity. A private survey released Thursday shows that Chinese manufacturing activity declined in August. A reading of 49.5 was reported for the Caixin manufacturing purchasing managers index for August, down from July's 50.4 and below the 50 mark, indicating contraction.

There is no doubt that the European Central Bank will join the Federal Reserve and the Bank of England in raising interest rates to combat inflation close to historic levels.

Events of the day

On Wednesday, data showed that inflation in the Eurozone hit a new record high in August, rising to 9.1% annually, a new high.

A 75 basis point increase at next week's policy meeting is widely expected after Germany's central bank chief called on the European Central Bank to act "decisively" to reduce inflation.

A report on US initial jobless claims and the ISM manufacturing PMI is due on Thursday. The weekly jobless report is expected to improve to 248K after falling to almost two months' lows last week. 

ISM will publish the manufacturing PMI in August, which is forecast to fall from 52.8 to 52 in July.

A softening labour market and slower economic activity can slow the rise of the US dollar in the short term despite the long-term expectations for more aggressive tightening from the Fed.