Global markets stumbled over the line to put a disappointing August to bed, although there were some positive developments emanating from China.
The main US indices each recorded losses of around 2% for the month, as concerns that interest rates may need to stay higher for longer took some wind out of investors’ sails. Even so, the increasing possibility of a soft economic landing amid a tight monetary environment remains the central hope, and the weaker summer performance has done little to derail the generally positive return.
In the year to date, the Dow Jones is ahead by 4.8%, while mega-cap technology stocks have propelled the S&P500 and Nasdaq indices to gains of 17% and 34% respectively.
The latest piece of the economic jigsaw was the release of the Federal Reserve’s preferred gauge of inflation, the personal consumption expenditures index, which showed a year-on-year gain of 3.3%, in line with expectations. Although some way off the Fed’s 2% target, the measure compares with a figure of 7% this time last year, underlining the progress which has been made.
Meanwhile, the core PCE measure which strips out the volatile components of energy and food added 4.2% compared to last year, again as expected, adding further fuel to the fire that interest rates will be kept on hold this month.
Elsewhere, there was an increase of 0.8% in consumer spending for July. The consumer accounts for around two-thirds of US economic activity and, as such, is an important barometer of both sentiment and growth.
There are increasing signs that spending may be slowing, however, as households are drawing on savings accumulated during the pandemic, with some increases in credit card spending suggesting that this particular well may be running dry. While a decrease in spending would represent further evidence that the Fed’s efforts are having the desired effect, the added difficulty is for the central bank to keep monetary policy tight, but without forcing the economy into recession.
Investors will now fully focus on the non-farm payrolls report later today, before retiring to a long weekend with Labor Day on Monday. The expectation is that 170,000 jobs will have been added in August, as compared to 187,000 in July. The unemployment rate is expected to have remained still at 3.5%, with any marked deviation from these numbers likely to provide short-term volatility as traders assess the impact on the economic backdrop.
Asian markets were buoyed by some rare good news from China. After another disappointing manufacturing activity number the previous day, the manufacturing PMI index moved to 51 from 49.2 the previous month, signalling an important shift from contraction to growth. With an improvement in domestic demand, new orders and output, investors are hoping that this could mark something of an inflection point.
However, one reading cannot be taken in isolation and overseas demand continues to weaken. Even so, although investors have been stymied by the lack of meaningful stimulus from the authorities, further assistance was announced in the form of lower rates on existing mortgages and the cutting of downpayment requirements for first-time buyers. This came alongside plans for China’s largest banks also to cut rates in an effort to boost consumption and help prop up an ailing property sector. The announcements are unlikely to cure all ills, but could represent an increasingly proactive stance from Beijing.
The positive development in China spilled over into UK markets at the open, with the FTSE100 moving ahead as investors began to revisit the appeal of the miners in an early boost to the sector.
The likes of Standard Chartered (LSE:STAN) and Prudential (LSE:PRU) also saw early gains given their Asian exposure. In a somewhat ironic twist, Johnson Matthey (LSE:JMAT) shares saw a gain of around 12% amid heavy buying interest at the open, the day after its relegation from the FTSE100 was confirmed.
The marginal advance in early exchanges was just enough to push the premier index back into positive territory for the year, albeit by a meagre 0.1%. Reports of further house price declines inevitably weighed on the property sector, as well as the wider FTSE250 index in its role as a UK economy barometer, leaving the index down by 1.5% so far this year.
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