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Craig Farley, of Team Asset Management, offers this week’s market review
‘The time has come for policy to adjust.’ This sentence, take from a recent speech to a symposium for central bankers at Jackson Hole, Wyoming, and given by US Federal Reserve chairman Powell, was the catalyst for a broad-based rally across risk assets.
Although news that the US central bank will finally begin cutting interest rates after an extended period of tightening was not a surprise to markets. Powell noted progress on inflation and said the Fed could now turn to the other side of its so-called dual mandate, namely the labour market, to ensure the economy maintains full employment.
US bellwether indexes the Dow Jones and S&P 500 continue to exhibit a strong “bouncebackability” trait, extending their gains and reapproaching all-time highs following a rough start to August. Amidst light trading volumes, retail investors piled into equities, with inflows into US stocks at their highest level in over a year.
Smaller capitalisation stocks and an equal-weighted version of the S&P index outperformed its capitalisation-weighted counterpart, suggesting the foot soldiers (all members of the index) rather than the generals (mega cap technology shares) are doing the heavy lifting, which is generally regarded as a healthy sign.
Investors were also treated to the release of the most recent minutes of the Federal Reserve Open Market Committee meeting that was held on July 30–31, 2024.
A dissection of the minutes revealed that the risks toward the Fed achieving its inflation goals (approximately a 2% “neutral” inflation rate) had decreased, and perhaps more interestingly, several participants said that progress on inflation and increases in the unemployment rate provided a plausible case for a 25-basis-point cut at July’s meeting, or that they could have supported such a move.
All told, investors viewed the developments as bullish in terms of the timing and extent of potential US rate cuts in this cycle. Money markets are pointing to a 100% chance of at least a quarter percentage point cut in September, raising the odds of a 50-basis-point reduction to one-third, and are forecasting over 100 basis points of cuts by year-end.
On the macro side, the US government’s annual process to revise initial estimates of jobs growth resulted in an unusually large downward adjustment, which indicated that the domestic labour market was not as strong as first appeared. Employers added 818,000 fewer jobs than previously thought in the 12-month period ended March 2024, based on records collected from state employment offices.
Meanwhile, independent research houses scraping some of the faster-moving consumer data from website visits to the top travel brands in America across airlines, accommodation, and cruise lines, suggest bookings have fallen sharply in recent weeks. This may indicate that consumers are being far more scrupulous when booking vacations, holding out for discounts, and wanting more value for money. Post-pandemic exhaustion?
A potential slowdown in economic activity is also being corroborated by a triggering of the Sahm Rule, something we are likely to hear more about in the coming weeks. Created by economist Claudia Sahm in 2019, this simple, accurate indicator looks at the rising rate of change in unemployment to predict economic recessions. It has just flashed red, and with the Fed amongst the biggest advocates of Sahm’s work, will surely be raising eyebrows.
Turning to the commodity markets, gold continues to shine, powering to fresh all-time highs this week. Gold aficionados will be whooping now that a solid bar (official weight of 12.4 kg) is now worth a cool million dollars. Global central banks continue to accumulate the yellow metal at a record pace.
Looking to the week ahead, American second-quarter GDP estimates and the Personal Consumption Expenditure (PCE) Price Index, the Fed’s preferred inflation gauge, will be closely watched. But the star of the show is likely to be Nvidia, which reports quarterly earnings on Wednesday.
To recap, since the launch of chat GPT in November 2022, Nvidia, the dominant provider of semiconductor chips needed to operate artificial-intelligence applications, has seen its market capitalisation rise by three trillion dollars. Markets will treat the results as a macro event, so important has the company become to the technology story. Guidance and delivery of its next generation Blackwell chip will be as critical as results.
