Market snapshot: mixed fortunes, China still central

Favour switched to more traditional stocks and away from the high-flying tech sector following the latest inflation reading, propelling the Dow Jones to yet another record close.

As expected, the core Personal Consumption Expenditures index rose to 2.7% in August from 2.6% in July, although on a monthly basis the number rose by just 0.1%, below forecasts of a 0.2% increase. The move seemed to consolidate the view that inflation is now on the cusp of settling at the Federal Reserve’s target level, which in turn leaves the central bank to watch the labour market more closely as it tries to engineer the fabled soft economic landing.

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The news also increased the likelihood of another 0.5% interest rate cut at the November meeting, with just over half of investors expecting another aggressive reduction, with a 0.25% decrease being seen at the very least.

Attention will turn at the end of the week to the non-farm payrolls report, which will inform the Fed’s current thinking, and where the consensus is that 145,000 jobs will have been added in September, compared to 142,000 the previous months and with the unemployment rate remaining unchanged at 4.2%.

The easing monetary backdrop favoured both the smaller cap index as well as boosting hopes of less pressure on the consumer, while a 2% dip in the NVIDIA Corp (NASDAQ:NVDA) share price had a disproportionate effect on the more technology focused indices. Despite the dip, the S&P500 and Nasdaq remain up by 20.3% and 20.7% respectively in the year to date, while the Dow Jones’ new push to a record high brings the cumulative gain to 12.3%.

Asian markets saw mixed fortunes overnight, with the Nikkei tumbling following the announcement of a new Prime Minister who has criticised the central bank’s easy monetary policy in the past. His remarks over the weekend were more conciliatory, however, giving some strength to the yen which then weighed on the shares of the country’s large exporters.

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For China, the outlook has transformed given the raft of measures promised by the authorities to reenergise the country’s ailing economy. Despite some concern about escalating tensions in the Middle East, Chinese markets forged ahead once more. A weak manufacturing survey confirmed the growing list of reasons why the stimulus is overdue, while a further announcement on Sunday that the central bank would be instructing lenders to lower mortgage rates added to the barrage of measures announced last week.

The blue chip CSI300 added almost 8% overnight on top of last week’s 16% gain, leaving investors to consider the fresh economic outlook at their leisure, as markets in the region close for a week from tomorrow on a public holiday.

Softer sentiment in the UK prevented any progress at the open, with GDP growth for the second quarter revised down from an initial reading of 0.6% to 0.5%, largely driven by a larger than expected decline in the manufacturing and construction sectors. The manufacture of transport equipment was a particular thorn in the side, dropping by 3.1% against an expected 0.7%.

Warning signs were also in evidence from a separate survey which confirmed other recent numbers suggesting that business confidence is currently on the wane given the immediate economic outlook, which includes concern over the severity of any Budget measures at the end of October.

In the premier index, Rightmove (LSE:RMV) shares declined by around 4% after rebuffing the latest approach from REA Group of Australia ahead of today’s deadline, which has thrown considerable doubt over whether this deal will progress at all, particularly given the board’s apparent reticence even to engage with the suitor.

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Increasing Middle East tension also weighed on airline stocks, with near 2% drops for International Consolidated Airlines Group SA (LSE:IAG) and easyJet (LSE:EZJ), although index losses were limited by further strength in the mining sector given the renewal of optimism on prospects for the Chinese economy.

The FTSE100 is now up by 7.6% this year and just 1.5% away from its previous record high, while the FTSE250 has added 7.7% on the back of a mixture of domestic economic resilience and increasing signs that UK shares are capturing the attention of potential overseas buyers.