Market snapshot: hugely significant week for investors

Equities stalled and bond yields rallied as a scorching employment report put investors firmly back on Fed alert.

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Non-farm payrolls rose by 162,000 in August, flying past the 58,000 which had been expected, with the unemployment rate remaining at 4.1% and in line with estimates. In addition, the surprise fall of 23,000 jobs in July was revised upwards to a positive 23,000, vindicating the Federal Reserve’s latest view that the labour market was less of an issue in its thinking. Even so, the likelihood of a rate rise this month ticked slightly higher, with traders pricing in a 57% possibility, as well as a 70% chance in October and a full sweep for a December hike.

Treasury yields moved higher after the report on the basis that the figure removes one plank which may have nudged the Fed towards keeping rates on hold this month, with the 2-year rising to 4.37%, its highest level since January 2025 and the 10-year to 4.78%, which compares with around 4.2% at the beginning of this year.

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Despite this repositioning, the main act is yet to come, with the release of the latest Consumer Price Index reading due on Friday. With various members of the Fed and indeed Chairman Kevin Warsh at Jackson Hole sounding hawkish warnings with inflation in mind, the report takes on added significance ahead of the rate decision next week.

The inflation report is expected to show that prices rose by 3.4% last month, which would be unchanged from July, but which would also remain some way above a 2% target which has now been elusive for more than five years. As such, any signs of disinflation – prices still rising but at a lesser rate – would be welcomed by equity investors in particular, even as rising energy prices provide a stiff headwind.

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Indeed, quite apart from the oil price, which is now around $97 as compared to $72 at the beginning of the Iran war, diesel prices soared to a high this year of $5.85 a gallon, which has an immediate effect on costs for transportation, farming, manufacturing and shipping. With oil, gasoline and diesel prices in the ascendance and with the conflict between the US and Iran showing signs of intensifying once more, there seems to be limited relief on the immediate horizon.

The main US indices go into the Labor Day holiday today, with markets closed, in good shape. In the year to date, the Dow Jones is ahead by 11.1%, while gains of 12.8% for the benchmark S&P500 and 14% for the Nasdaq tending to focus on the major tailwinds of a resurgence of interest in the AI trade and, in particular, the strength of corporate earnings which have breezed past expectations in the last two quarters.

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The FTSE100 was again a laggard, drifting lower on the open in the absence of any obvious positive catalysts. There was some limited relief from BP (LSE:BP.) and Shell (LSE:SHEL), which rode the back of the latest oil price hike, while some strength overnight in Asia for AI stocks lifted Polar Capital Technology Ord (LSE:PCT) to a brisk opening.

However, there was a stronger markdown across a selection of sectors, both cyclical and defensive, which weighed on the index. While the losses were contained, the primary index seems unable to break through and then hold the record level achieved in February, even though that target is just 0.9% away.

Nonetheless, a gain of 9% in the year to date for the FTSE100 and an additional average dividend yield of 3% is a fine total return for investors in what had previously become a beleaguered index.