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Markets last week
Summary
Markets were stable, with equities rising and bond yields falling amid expectations of a Federal Reserve (Fed) easing cycle
The Bureau of Labour Statistics revised job creation figures down for the last year by 818,000, showing slower growth than previously reported - but from a strong baseline. Data last week did not indicate any immediate severe downturn in the labour market
Fed Chair Jerome Powell solidified the Federal Open Market Committees’ (FOMC) intent to cut rates in September, noting a shifting priority in favour of economic stability over inflation containment
The US Democratic Party’s nominee for president, Kamala Harris’ ‘honeymoon period’ continued as she widened her lead over her Republican Party challenger, Donald Trump, focusing on a pragmatic campaign, although challenges remain with public perception
This week eurozone inflation is expected to have slowed in August to 2.2%, which would support further European Central Bank (ECB) easing.
This week in the US, the core PCE price index is expected to show a slight increase, aligning with the Fed’s 2% inflation target
Overall, cautious optimism prevails as investors monitor economic signals and Fed policy moves.
Markets last week
Market environment
Financial markets were stable, although there were notable drivers in an environment of heightened sensitivity to economic signals, and excitement ahead of the Fed’s increasingly certain easing cycle. Equity markets mostly drifted higher and bond yields wafted lower as investors calibrated their expectations following the volatility at the start of August. The overarching sentiment is one of prudent optimism.
US labour market
Labour market data released earlier in the month caused some anxiety as the unemployment rate ticked up to 4.3%, a seven-year high - excluding the pandemic. This raised concerns about the likelihood of a more severe economic slowdown.
The uptick triggered the ‘Sahm rule’, which flags a recession when the three-month average unemployment rate rises by 0.5% above its 12-month low. However, this signal was interpreted with caution, as some analysts, including Claudia Sahm herself disavowed the signal in this instance, saying “rules are meant to be broken”, and suggesting that the evidence does not support a US recession.
Last week the Bureau of Labour Statistics released their annual revisions to payrolls, revising the number of jobs created in the last year down by 818,000, tempering the strong pace of job growth previously reflected in the data. Meanwhile weekly jobless claims were stable, reinforcing the view that while the pace of job creation has slowed, there’s no immediate sign of a sharp deterioration in employment conditions.
Fed policy speculation
Following remarks by Fed Chairman Jerome Powell at the Jackson Hole Economic Policy Symposium, expectations for future rate cuts have been solidified. Powell indicated a quarter-point rate cut in September, rather than a larger 50 basis points (bp) reduction. The market is currently pricing in over 100bp of cuts by the end of the year. Powell's comments underscored a cautious but confident determination towards easing.
The market’s reaction was swift: stocks rose, and the dollar weakened. Powell's acknowledgment that the labour market's cooling is “unmistakable" and his commitment to "do everything we can to support a strong job market" suggests that the Fed is now prioritising economic stability over inflation containment.
US Treasury yields drifted lower as investors anticipated an easing cycle. Some scepticism lingers about the pace of rate cuts currently implied by the market, given the resilience of economic data and that four cuts are expected in the space of three FOMC meetings - an unlikely occurrence in the absence of further economic deterioration.
US election and the Democratic National Convention
Vice President and the party’s nominee for president, Kamala Harris, expanded her lead over former president Donald Trump. Her campaign emphasises a "new way forward," focusing on a pragmatic and disciplined approach with vague policies that aim to appeal to a broad base of voters. Challenges persist for Harris, including perceptions of her being too cautious; her association with the policies of the Biden-Harris administration; her lack of willingness to appear in front of the press or to debate and her lack of clarity when she has previously done so.
The week ahead
Wednesday: Nvidia earnings report
Our thoughts: Nvidia has been a significant driver of equity markets this year. The company is set to report its second quarter earnings on Wednesday, which will be a major focus for the markets this week.
Friday: Eurozone inflation
Our thoughts: Eurozone inflation in August is expected to have slowed on a year-on-year basis to 2.2%, driven primarily by energy base effects (data from a year ago dropping off the year-on-year calculation). Nonetheless, should this materialise, it will support the case for further easing from the ECB.
Friday: US PCE inflation
Our thoughts: The July data is expected to show a mild uptick. Despite this, monthly inflation is anticipated to remain broadly consistent with the Fed’s 2% target, including the core PCE measure - the Fed’s favoured gauge.
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