Markets Today: German Economy Shrinks, Japan Inflation Hits 8-Month Low. All Eyes on Jackson Hole and Fed Chair Powell

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Asia Market Wrap - Japan Inflation Hits 8-Month Low

Most Read: Nikkei 225 Technical: A potential bullish reversal looms after a 4% decline as market breadth improves with earnings upgrade

Asian stocks stayed mostly steady on Friday as traders waited for a key speech by Federal Reserve Chair Jerome Powell at the Jackson Hole symposium this weekend, hoping for clues about future monetary policy.

MSCI's broad Asia-Pacific index outside Japan fell 0.1% after early gains, reducing its monthly rise to 1.3%. Meanwhile, China's blue-chip CSI 300 index jumped 1.8%, marking its third straight day of gains. Tech stocks led the rally after DeepSeek upgraded its V3 AI model and reports that Nvidia asked Foxconn to pause work on the H20 AI chip, boosting Chinese competitors.

China's tech-heavy STAR 50 index surged nearly 8%.

Japan's Nikkei 225 fluctuated between gains and losses, ending down 0.1%.

In Japan, core consumer prices slowed for the second month in July but remained above the central bank's 2% target, fueling expectations of a future rate hike. The headline inflation rate dropped to 3.1% in July 2025, down from 3.3% in June, the lowest level since November 2024. Electricity prices fell for the first time since April 2024 (-0.7% compared to a 5.5% rise before), while gas prices stayed the same after rising 2.7% previously.

However, this didn’t help the yen, which was set to drop 1% for the week. Bank of Japan Governor Kazuo Ueda is also scheduled to speak at Jackson Hole this weekend.

German Economy Shrinks

Germany's economy shrank by 0.3% in Q2 2025, worse than the earlier estimate of a 0.1% drop, reversing the 0.3% growth from the previous quarter. This was the biggest quarterly decline since Q2 2024, mainly due to a 1.4% drop in fixed capital investment, with weaker spending on construction, machinery, equipment, and vehicles.

Trade also hurt growth, as exports fell by 0.1% (down from 2.5% growth) due to higher U.S. tariffs, while imports rose by 1.6%. Private consumption slowed significantly to 0.1% (from 0.6%), though government spending rebounded by 0.8% (from a 0.3% decline). Inventory changes added positively to growth.

By sector, output declined in manufacturing, construction, trade, transport, hospitality, and financial services. On a yearly basis, the economy grew 0.2%, slightly below the 0.3% growth in Q1, marking the second straight quarter of annual growth.

European Open - All Eyes on Jackson Hole

European stocks edged higher on Friday, with the STOXX 600 index up 0.2%, heading for its third straight weekly gain. Most regional markets were also positive, including Germany's DAX, which rose 0.1% after a slow start.

The European Union announced plans to push for reduced U.S. tariffs on certain sectors, including retroactive lower tariffs on car exports from August 1, and continued efforts for preferential tariffs on wine and spirits. This helped boost automobile stocks by 0.6%.

UBS maintained a "neutral" stance on eurozone equities, citing short-term economic uncertainty, and cut its earnings growth forecast for the region this year to -3% from 0%. Despite this, European companies are expected to report 4.6% earnings growth for Q2, down from the 9.1% initially forecast before U.S. tariffs were announced in February.

In the chemicals sector, AkzoNobel shares jumped 5.2% after activist investor Cevian Capital acquired a 3% stake. Standard Chartered shares rose 3.5% following a favorable ruling from the U.S. Department of Justice in a long-standing civil case.

Defence companies Renk Group and Hensoldt saw gains of 1.7% and 3.3%, respectively, after Citigroup upgraded their ratings from "sell" to "neutral."

On the FX front, The euro and the British pound hit their lowest levels since early August, both down 0.1%, with the euro at $1.1597 and the pound at $1.3408.

Meanwhile, the dollar index, which tracks the U.S. dollar against six major currencies, rose 0.1% to 98.71, heading for a 0.9% weekly gain and breaking a two-week losing streak. Elsewhere, the Japanese yen weakened to 148.56 per dollar, set for a 0.9% drop this week.

Currency Power Balance

Source: OANDA Labs

Oil prices held steady on Friday as hopes for a quick peace deal between Russia and Ukraine faded, setting the stage for the first weekly gain in three weeks.

Brent crude fell 17 cents (0.25%) to $67.50 a barrel, while West Texas Intermediate (WTI) dropped 13 cents (0.2%) to $63.39.

Both benchmarks rose over 1% in the previous session, with Brent up 2.8% and WTI up 1% for the week so far.

Gold prices fell on Friday as the stronger dollar weighed on the market. Spot gold dropped 0.4% to $3,326.35 per ounce, while U.S. gold futures for December delivery also declined 0.4% to $3,368.80.

For more on Gold, read Gold (XAU/USD) Eyes $3383/oz After Bullish Pennant Breakout. Will Fed Chair Powell Add Fuel to the Rally?

Economic Data Releases and Final Thoughts

Looking at the economic calendar, a quiet day for the US with the biggest data release coming from Canada in the form of retail sales data.

Fed Chair Jerome Powell is set to give a keynote speech today at 16:00 CET. He is likely to stick to a cautious approach, leaving the Fed's options open for September. His guidance will likely align with the Fed's June projections, which showed most members expecting two rate cuts this year.

Powell may tie the Fed's September decision to upcoming data, including the jobs report on September 5 and the inflation report (CPI) on September 11. While his cautious tone might disappoint those hoping for strong support for a September rate cut, he will likely address the sharp downward revisions to job data from May and June. Despite this, the market is still likely to see a 50% or higher chance of a rate cut in September.

For all market-moving economic releases and events, see the MarketPulse Economic Calendar. (click to enlarge)

Chart of the Day - FTSE 100 Index

From a technical standpoint, the FTSE 100 finally breached the all-time highs and continues to advance.

US Indexes have been struggling but the FTSE has remained resilient.

The period-14 RSI continues to fall short of overbought territory , each time a pullback before the next leg higher.

There is a small triangle pattern in play on the two-hour chart which could lead to a break to the downside. So far however, such moves have been met by significant buying pressure.

A break of the triangle pattern in either direction could lead to a potential 60 point move.

FTSE 100 Two-Hour Chart, August 22, 2025

Source: TradingView.com (click to enlarge)

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