Labour week
César Pérez Ruiz, Chief Investment Officer, Pictet Wealth Management.
THE WEEK IN REVIEW
After a frightening start to the month, US equities ended August on a more even keel last week as markets looked forward to Fed rate cuts, inflation gauges held steady, and investors retained faith in the ‘soft landing’ narrative (although the nonfarm payrolls report this week will be decisive). A highlight of the week was the unveiling of Q2 results by the dominant AI chip giant. In the event, forward guidance from the company did not satisfy some parts of themarket and proved a drag on the performance of the S&P 500i, which returned 0.27% last week (in USD). The Stoxx Europe 600ii did better (gaining 1.4% in euro), rising to a record high last week as the market focused on its relatively cheap valuation and ECB rate cuts loomed. Bond markets were choppy last week, with longer-term yields rising as data came in and expectations for Fed hikes were adjusted. Currency volatility remained high, with the USD index regaining ground last week while the euro struggled against the Swiss franc and sterling as well as the greenback.
GEOPOLITICS
Canada said it would levy a 100% tariff on imports of Chinese electric vehicles and announced a 25% tariff on Chinese steel, earning a rebuke from Beijing.
KEY DATA
The Ifo Institute’s Business Climate Index declined for the fourth consecutive month in August (to 86.6 from 87.0), indicating the German economy remains mired in difficulty. German consumer inflation fell more than expected last month, plunging to an annual 2% from 2.6% in July. Consumer inflation in the wider euro area dropped to 2.2% from 2.6%.
The figure for US GDP growth in Q2 was revised up to an annual 3% from a previous estimate of 2.8%. The personal consumption expenditures (PCE) price index in the US rose at an annual rate of 2.5% in July, unchanged from June. ‘Core’ PCE was also unchanged, at 2.6%.
The core consumer price index in the Tokyo region rose by 2.6% year-on- year in August, well up from 2.2% in July. Elsewhere in Asia, initial estimates put Indian GDP growth at an annual rate of 6.7% in Q2, down from 7.8% in the previous three months.
MARKET VIEW
US payrolls and job openings data this week will be key for reassuring markets that the world’s largest economy remains on track for a soft landing and is not heading for a recession. Recent growth and inflation data have suggested a lower risk of recession and US markets, closed on Monday for Labor Day, are seeing broader participation and a broadening in performance. However, market participants, while cheered by Fed Chair Jay Powell’s dovish tone in Jackson Hole, are now in wait-and-see mode. We expect the Fed to make three 25 bps cuts this year, starting this month.
Weak results from one US retailer and a warning from another that poorer consumers are running out of money highlighted the US slowdown. In the medium term, the USD is likely to weaken. Weak results from a Chinese e-commerce company showed China’s consumers are struggling too.
In politics, a win for the Alternative for Germany (AfD) in a regional election adds to global political instability. Halts to Libyan oil exports due to a standoff between rival political factions have helped support the oil price.
