Market snapshot: another inflation acid test to come

US markets ended the week on the front foot as a much weaker than expected payrolls report dimmed concerns of an imminent interest rate hike.

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The non-farm payrolls reading showed that 23,000 jobs had been lost in July, as opposed to the consensus of a gain of 80,000, with the previous May and June reports also revised downwards by a combined 103,000, implying that the labour market is not quite as robust as most had assumed. The report also clouded the situation in that the unemployment rate fell to 4.1% from a previous 4.2%, suggesting that some had dropped out of the labour force since the number is measured on those actively seeking employment, as opposed to indicating any improvement in the jobs market generally.

In turn, the likelihood of an interest rate hike in September fell to around 45% from almost 70% a week earlier, as the Federal Reserve’s dual mandate comprises both employment and inflation. In terms of the latter, the next test of the Fed’s resolve will come on Wednesday with the release of the Consumer Price Index, where inflation is expected to ease to 3.4% from 3.5% in June, although still well north of the central bank’s ultimate 2% target. Retail sales on Friday will then round off an important week for economic data which will provide the most recent clues in determining the Fed’s outlook and could well upset the current levels of optimism.

Such optimism has been largely driven by another stellar quarterly reporting season, with 90% of the S&P 500 now having released their figures alongside an estimated 50% spike in overall profit growth. These levels assuage some concerns that stocks are becoming overpriced as earnings match the required heights in justifying higher valuations. The more recent recovery in chip stocks has also provided a further buffer, with the Nasdaq having gained 5.2% last week and the iShares Semiconductor ETF more than 7% as revenues continue to suggest that some repayment of the massive capital investment which has been undertaken in AI could be on the horizon.

In the meantime, the S&P 500 powered to a fresh record close at the end of the week bringing its gains in the year to date to 13.3%, with similarly impressive returns from the Dow Jones and Nasdaq which have added 12.4% and 14.8% respectively. Some of this froth may be under threat as weekend events apparently showed little progress towards any solution of the Middle East conflict and the thorny Strait of Hormuz issue in particular, although this has had a very limited impact so far on either the oil price or Dow futures at this early stage.

In the UK, the current star of the show is the often overlooked and perhaps underappreciated FTSE 250, which closed at a record high for the second consecutive day on Friday. The index has seen the benefit of a range of positive developments ranging from a surge of takeover bids this year, selective institutional buying and its exposure to sectors such as aerospace and engineering which have shown robust growth. There is also an element of a surprisingly resilient UK economy, for which the index is seen as something of a barometer and a report suggesting that the jobs market could be stabilising failed to provide much of a boost at the open, although the FTSE 250 remains ahead by 10.6% in the year to date.

For its part, the FTSE 100 ended the week within a whisker of the previous record high set in late February but was unable to quite get over the line. The target moved slightly further away in a marginally weaker open which saw a broad lack of buying interest which could well be explained by the revitalised interest in markets elsewhere, most notably the US.

Gains for Scottish Mortgage Ord (LSE:SMT) and Polar Capital Technology Ord (LSE:PCT) reflected the strong end to the week for the tech index across the pond, but a broker downgrade to Legal & General Group (LSE:LGEN) pulled its shares lower and read across to the likes of Admiral Group (LSE:ADM), Hiscox Ltd (LSE:HSX) and Standard Life (LSE:SDLF). Despite the drift in opening exchanges, the FTSE 100 is still ahead by 9.6% so far this year and just 0.2% from the currently elusive record closing high.