Market snapshot: drifting sentiment after rate cuts threat

Markets drifted following a report which revealed that inflation remains somewhat stubborn and sticky, leading to another re-evaluation of the Federal Reserve’s likely next move.

The rise in the Consumer Price Index may have been the lowest in almost four years, but the monthly and annualised gains of 0.2% and 2.4% were slightly ahead of the expected 0.1% and 2.3%, suggesting that inflation is still too warm for comfort.

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A separate release on weekly jobless claims showed a slight but unexpected rise, although some of this was attributed to the strike action at Boeing Co (NYSE:BA) and the immediate impact of former Hurricane Helene. Even so, taken together the two readings could suggest an environment in which interest rate cuts are questionable, with the Fed having previously assumed that the inflation genie was back in the bottle.

Expectations remain that there will be a reduction of 0.25% in November, although the latest data throws some doubt over a follow-up cut in December. There is also a 20% chance, in terms of consensus, that there may be a no change decision next month. There will, of course be various data points before then, but the ongoing uncertainty was enough to unsettle investors after what had otherwise been a promising week.

The third-quarter earnings season begins in earnest today, where growth is expected to have risen by around 5% on the corresponding period last year. JPMorgan Chase & Co (NYSE:JPM) and Wells Fargo & Co (NYSE:WFC) will get the ball rolling, with focus on the state of consumer defaults, loan demand and, as the other banks report, whether there has been a return to higher income at the investment banking operations.

In the meantime, the main indices remain comfortably ahead in the year to date, with gains of 12.6% for the Dow Jones, 21.2% for the S&P500 and 21.8% for the Nasdaq.

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In Asia, China remains the story in a week which started strongly on momentum from the previously announced stimulus intentions, only to subsequently flounder on disappointment at the lack of any meaningful detail. Most markets have succumbed to a loss for the week in the region, such as the Chinese blue chip index which fell by almost 2% overnight and is down by 2.3% cumulatively, and the Hang Seng index which finished down by 6.5% prior to a public holiday today.

Apart from the obvious detail, the other missing part of the jigsaw from Chinese authorities was any specific reference to fiscal stimulus plans. Investors are now pinning their hopes that the briefing scheduled for tomorrow will unveil a detailed set of fiscal measures to complement the initiatives already announced, although based on past experience sentiment remains skittish and slightly cynical.

UK economic output resumed growth at 0.2% in August after having flatlined for the two months previous, although it is far from enough of an improvement to hang out the bunting. The number exceeded last year’s number, although the opinion remains that slowing growth could be the theme for the rest of the year, which leaves the likelihood of an interest rate cut in November in play.

Quite apart from concerns around the possible austerity of the upcoming Budget, consumer and business confidence has been shaken by the warnings of the new government which apparently plans to take tough action where need be. The FTSE250 is seen as something of a barometer for the UK economy and has trimmed some of its earlier gains as a result of this malaise, now standing up by 5% so far this year.

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The premier index also opened unconvincingly, unable to make any initial progress and hampered by slightly stronger sterling and a lower oil price.

Some strength in the gold price gave a slight lift to the likes of Fresnillo (LSE:FRES) and Endeavour Mining (LSE:EDV), although some early weakness in Sainsbury (J) (LSE:SBRY) offset any possible progress. It was reported that Sainsbury’s biggest shareholder, the Qatar Investment Authority had sold more than 100 million shares yesterday, estimated to be equivalent to around 5% of its holding.

The tepid start for the FTSE100 reduced its progress in the year to date to 6.4%, with the upcoming reporting season likely to be the next test of investors’ mettle.