Equity markets had a quiet end to the summer holidays despite a fair few events which could potentially have created some volatility. Global equities ended last week down slightly, having edged up the previous week. UK and US stocks both gained 0.5% or so in sterling terms over the last fortnight while Europe, Japan and emerging markets were all down around 0.5%.
Bonds also ended the last fortnight little changed. Government bond yields edged down in the US and up in the UK, leading to small positive returns for US Treasuries and token losses for UK gilts. Gold, by contrast, sprang to life with the price up 3% and tested $3480 this morning, the high touched briefly back in April.
The Federal Reserve has been centre stage recently, both for the right and wrong reasons. At its annual jamboree at Jackson Hole, Chair Powell signalled his apparent support for a rate cut later this month, stating that the softening labour market could offset the inflation risks from Trump’s tariffs.
The market had already been anticipating a 0.25% cut on 17 September but this cemented expectations and last week’s crop of US data did little to change things. While the headline US growth rate was revised higher in the second quarter to a seemingly strong 3.3% annualised rate, the underlying pace was a more moderate 1.9%. Meanwhile, the Fed’s favoured measure of core inflation as expected edged up to 2.9% in July.
Rather more controversially, Trump fired with immediate effect Lisa Cook, one of the Fed Governors, for alleged mortgage fraud. However, she is contesting his right to do so and this battle looks like heading to the Supreme Court.
This action is part and parcel of Trump’s more general move to pack the Federal Reserve with his appointees, culminating in Powell’s successor whose term ends in May. This in turn is why the market now believes US rates will be cut as far as 3% by the end of next year from their current 4.25-4.5% – even though inflation is likely to head above 3% over coming months.
While concerns about the US Administration’s attacks on the Fed’s independence and the potential inflationary consequences are rising, they have not as yet led to a significant increase in bond yields. In fact, 10-year Treasury yields – which are the most important reference point for investors in all markets – have edged lower recently and are back down to 4.2%, a full 0.6% below their January high.
It had looked like being a quiet time for tariff news with no developments other than the US proceeding with its threatened 50% tariff on imports from India – 25% of this being punishment for importing Russian oil. But Friday saw out of the blue a US court rule that most of Trump’s tariffs were illegal.
The ruling will not take effect until 14 October and this too will very likely head the way of the Supreme Court which may well side with Trump. Even if it doesn’t, this is unlikely to spell the end of the tariffs but just lead to most of them being implemented in some form or another under alternative legislation.
Nvidia has also been centre stage although in the event its second quarter results last Thursday proved a damp squib with its share price ending the week down a modest 2%. Revenues were up a stonking 50% on a year earlier and net income up 59%. Both were better than expected but not enough to drive further share price gains given uncertainty over its prospects in China, doubts over quite how long the current bonanza will last and the fact that the share price is already up 30% this year.
France also managed to pull a rabbit out of the hat – even though it has tried this particular trick before and come to regret it afterwards. Echoing a similar move by his predecessor Michel Barnier, PM Francois Bayrou has called a vote of confidence on 8 September after failing to garner sufficient support for his budget deficit cutting measures.
Assuming, as looks very likely, Bayrou loses the vote of confidence, the result will probably be more political paralysis – whether or not new parliamentary elections are called or just a new government formed. Either way, it should be cause for continued market malaise rather than trigger a crisis.
Back here in the UK, the government has been in full re-shuffle and kite-flying mode. Last week saw Starmer replace his principal private secretary and further moves to shake up his team at No 10 were announced this morning. With the Budget shaping up to be an important one, the PM appears to be beefing up the economic input into his operation.
As for kite-flying, the last few weeks have seen umpteen potential ideas floated regarding the tax increases looming in the forthcoming budget. With the most obvious tax hikes ruled out by Labour’s pre-election pledges, this has once again left Reeves scrabbling around the edges with various forms of increased taxes on property, wealth, pensions, capital gains and rental income all rearing their head.
Last week, however, the UK banks were the subject of the latest speculation with talk of potential tax increases on the sector leading to their stock prices falling 4%. The truth is that no-one yet knows – including maybe even Rachel Reeves – what exact form the tax rises will take.
This coming week, US business confidence and payroll data will be the main macro focus for the markets.
Rupert Thompson – Chief Economist