Market snapshot: is a Goldilocks scenario for the economy realistic?

While Wall Street puts in strong sessions amid hopes of a soft landing for the world's largest economy, it's a different picture elsewhere. Our head of markets looks at latest developments here and overseas.

US markets resumed the recent rally which has been driven by the increasing possibility of a soft economic landing.

The so-called “Goldilocks” scenario, in which inflation is finally tamed without significant job losses and in which a recession is avoided, has seemingly become a real possibility after recent economic data.

The latest data from Friday was the Federal Reserve’s preferred measure of inflation, the Personal Consumption Expenditures price index, which showed that inflation continues to weaken. A monthly increase of 0.2% was in line with expectations, with core PCE coming in better than expected year-on-year at 4.1%. At the headline level, the reading of a 3% gain compared to a rise of 3.8% in May. A strong GDP number also boosted sentiment in confirming further growth despite monetary tightening.

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Adding further grist to the mill for bullish investors, the earnings season has provided more upside surprises than expected so far, albeit against a fairly low level of expectations. It is estimated that with around half of the current season now complete, around 80% of companies have beaten analyst expectations, even to the level of the mega-cap technology shares which have been major contributors to excess Nasdaq gains this year. A further test to this optimism will come later in the week as both Apple Inc (NASDAQ:AAPL) and Amazon.com Inc (NASDAQ:AMZN) provide their latest trading updates.

The non-farm payrolls figure on Friday will also provide a key indication as to the latest state of play in what has been a resilient labour market. The consensus is that 200,000 jobs will have been added in July, which compares with a number of 209,000 in June, although equal attention will be given to both the unemployment rate as well as the level of wage growth.

In the meantime, the main indices continue their onward march in the year to date, with the Dow Jones ahead by 7%, the S&P500 by 19% and the Nasdaq by 34%, although the latter remains some 10% shy of the record highs which it hit in November 2021.

Asian markets were mixed on more local concerns, with China again grabbing the headlines as its economic recovery continues to falter. Factory activity remained below 50 and therefore in contraction mode for the fourth month in a row, while the services number also disappointed. The market continues to be hamstrung by the lack of a coordinated and sustained stimulus from the authorities, which could potentially reignite growth especially within the ailing property sector and for consumer spending.

UK markets opened in neutral in the absence of any direct catalysts. Later in the week, the Bank of England is expected to announce a further interest rate rise of 0.25%, with an apparently faint possibility of a 0.5% hike also in play. 

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HSBC Holdings (LSE:HSBA) will round off what has been a mixed half-yearly bank reporting season, while updates from the likes of BP (LSE:BP.), Taylor Wimpey (LSE:TW.) and Next (LSE:NXT) will provide varied and further colour on the current state of the nation from a trading perspective.

The FTSE 100 index has been unable to replicate the strong growth being seen across the pond, and indeed may have seen some pressure as investors switch to that potentially stronger growth environment. The premier index is ahead by 3.2% in the year to date, while the more domestically-focused FTSE250 has edged a gain of just 1.4% given the uncertainties which continue to hover over the UK economy.