Markets were quietish last week, leaving investors undisturbed for the most part to enjoy the last of the summer holidays. Global equities were up 0.5% in local currency terms and 0.7% in sterling terms. The sharp but short-lived market sell-off in early August already seems a long time ago with equities back up to within 0.5% or so of their mid-July peak.
Bonds were also becalmed last week, with yields drifting higher and Treasuries and Gilts both down around 0.5%. The difference from equities is that bond yields remain significantly lower than in mid-July, particularly in the US.
The reason is that the US Fed has reinforced hopes of a rate cut at its next meeting on 18 September. A ‘vast majority’ of Fed officials at their July meeting viewed a cut as likely this month assuming no major data surprises. And in Chair Powell’s big speech from the wilds of Wyoming the Friday before last, he reinforced this message and said the Fed did not wish to see a further cooling in labour market conditions.
Last Friday saw news that the Fed’s favoured measure of core inflation was unchanged at 2.6% in July. This did nothing to alter the market’s view that a 0.25% cut is on the cards, albeit not the 0.5% reduction some were calling for at the height of the market panic a few weeks ago.
But with the Fed’s focus now as much on averting a further slowdown in the labour market as reducing inflation, this Friday’s August payrolls report will be more important than ever. Most likely, there will be some recovery from the weak July numbers which were partly to blame for the summer sell-off.
In contrast to the cheery words from Chair Powell and the optimism espoused by Presidential Nominee Harris at the Democratic Convention, our own leaders have done their best to wipe out any feel-good factor generated by the faster than expected recovery in the UK economy this year.
Despite his rosy backdrop, Starmer warned that things will get worse before they get better and of a painful Budget in October. Pensions and capital gains are prime candidates to help fill the infamous £22bn ‘black hole’ that Reeves has found in the public finances. Meanwhile, BOE Governor Bailey warned that it was too early to declare victory over inflation, even while admitting the risks of persistent price pressures appear to be receding.
Rightly or wrongly, the BOE will most likely hold off cutting rates at its meeting on 19 September, delaying the next cut until November. By contrast, the ECB looks set to implement its second reduction (the first was back in June) on 12 September, not least because the headline and core rates of inflation fell in August to 2.2% and 2.8% respectively.
However, last week’s big market event related to none of the above. Instead, it was Nvidia’s results on Wednesday. The chip producer saw revenues up a massive 120% on a year earlier. But in contrast to recent quarters when its results way exceeded expectations, its latest numbers were merely in line. Production problems with the roll-out of its next generation of AI chips also didn’t help.
The net result is that Nvidia’s share price is off around 4% since the results and down 12% from its all-time high earlier in the summer. As for the so-called Magnificent Seven overall, they are down 10% from their July high. Our view remains that the best is now behind the Mag. Seven. And, as has usually been the case when the equity market has become this dominated by a handful of stocks, gains should now broaden out to the rest of the market.
The big proviso here is that the US does not fall into recession. Despite the recent bout of recession fever, we still see very few signs that one is on the cards, particularly with the Fed now clearly willing to cut rates to head one off, if need be. Still, there will undoubtedly be some market nervousness heading into this week’s key event, the US payroll numbers on Friday.
Rupert Thompson – Chief Economist