Market snapshot: stars align for rates and stock prices

With a US interest rate cut looking like a dead cert next week, the only debate is what the scale of the reduction might be.

The Federal Reserve has a dual mandate which covers inflation and employment, and updates on both yesterday paved the way for monetary easing, sending each of the main indices to both intraday and record closing highs.

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Underpinned by a week which has seen AI euphoria rekindled, stocks have risen across the board including the high-performing tech sector as well as the likes of banks and retailers which should benefit from a lower interest rate environment.

While inflation rose for the month to 0.4% against expectations of 0.3%, the annualised figure of 2.9% was in line with estimates, as was the core CPI which came in at 3.1%. With inflation a touch higher then ideal but steady, this releases the Fed to concentrate on the labour market, which showed further signs of deterioration as weekly jobless claims jumped to 265,000 from 236,000, the highest since 2021.

As such, the economy is in need of some stimulus before it begins to edge towards recessionary waters. A cut of 0.25% next week remains the most likely outcome, with a vague possibility of a 0.5% reduction which would certainly send an aggressive signal which could even appease the President. In any event, the market is now pricing in a total of 0.75% in reductions before the end of the year.

With what seems a conclusive cocktail of monetary easing, tech strength and broader corporate health, the market has responded strongly, erasing any concerns following “Liberation Day” which initially rattled investors. The fresh record highs represent gains of 8.4%, 12% and 14.1% in the year to date for the Dow Jones, S&P500 and Nasdaq respectively.

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A similar theme is playing out in Asia despite the debilitating effects of the tariffs, with indices in Japan, South Korea and Taiwan also at record highs, and with Chinese blue-chip stocks touching peaks not seen for three years. For now, the world’s second-largest economy is showing some signs of stability following previous stimulus, although the concerning puzzle of high youth unemployment, weak retail demand and a beleaguered property sector not yet fully solved.

The UK is responding to mixed signals, whereby the domestic economy is flatlining, although this has had little effect on the FTSE 100 whose attentions are largely elsewhere given the global focus of most of its constituents.

A GDP reading showed that zero growth had been achieved in July which, while in line with expectations, was in contrast to the 0.4% growth the previous month, with manufacturing and pharmaceuticals among the culprits, as well as the strong possibility that consumers and businesses are cutting back ahead of another possible round of tax increases in the Autumn Budget. With the Bank of England’s hands largely tied given the current levels of inflation, the obvious solution of a further round of interest rate cuts seems a forlorn hope for now.

Nonetheless the premier index joined the bullish global party in opening trades, trending higher to stand within a whisker of the previous record high set last month.

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The proliferation of mining stocks at the top of the leaderboard reflected the risk-on approach which investors are employing, with the likes of Endeavour Mining (LSE:EDV) and Fresnillo (LSE:FRES) enjoying the additional boost of further gold price strength.

A slight fly in the ointment came from the oil majors given some weakness in the underlying commodity, but for the most part investor sentiment remains buoyant, lifting gains for the FTSE100 to 14% in the year to date.