Market Pulse: The Fed’s turning points

The Federal Reserve has a “dual mandate”, and that keeps it spinning two different plates all the time. One plate represents price stability – that is, long-term inflation around 2% – and the other represents maximum employment. The Fed’s task is to adjust interest rates and other tools in a way that keeps the two plates rotating smoothly, without either one crashing to the floor. Lately, the inflation has been reassuring, but there are growing concerns about the labour market. So, it’s no surprise that the central bank says it’s now devoting much of its focus to that one.

That makes the coming week a big one for the Fed: on Friday, the US Labor Department will release its key monthly employment report for August. It will be the final up-close view into the health of the country’s job market before the Fed convenes for an interest rate decision on 19 September. 

Economists are forecasting that the US economy added 165,000 new jobs in August. But if the report’s figures fall well short of that or if the 4.3% unemployment rate moves much higher, that will sharply increase the likelihood that the Fed will cut interest rates faster, with a 0.5 percentage point cut, instead of a 0.25, to give the labour market the kind of boost that lower borrowing rates can bring. However, the stock market probably won’t respond well: it’s likely to take a downturn if the labour market report offers further hints that a recession may be on the horizon.

Now, the Fed has three interest rate decisions left on the calendar this year, and traders are already betting it will announce a 0.25 percentage point trim on two of those dates and a 0.5 percentage point cut on the other. If they’re right, the August job report could determine how quickly interest rates come down. And that makes this a big week for investors too.

In the calendar 

• Monday: UK manufacturing PMI (August), US markets closed for Labor Day. 
• Tuesday: US manufacturing PMI (August).
• Wednesday: China PMIs (August), UK services PMI (August), US job openings and labour turnover survey (August), US trade balance (July), Bank of Canada interest rate announcement. Earnings: Hewlett Packard Enterprise.
• Thursday: US ISM Service PMI (August), eurozone retail sales (July). Earnings Docusign.
• Friday: US labour market report (August), UK house prices (August), Japan household spending (July).

What you might’ve missed last week

US

• Nvidia’s earnings beat estimates for the seventh consecutive quarter.
• Berkshire Hathaway became the first non-tech company to join the $1 trillion club.
• Apple and Nvidia entered talks to invest in ChatGPT maker OpenAI.

Europe

• European stocks hit new record highs.

UK

• The number of properties for sale in the UK has reached its highest level in seven years.
• Luxury fashion brand Burberry is set to leave the FTSE 100, marking the end of its 15-year run in the UK’s top stock market index.
• British retailers reported their third consecutive month of declining sales in August and anticipate another drop in September.
• Banks have prepared for a surge in lending due to the UK government’s new plan to tackle the housing shortage.

Why it matters

Nvidia’s earnings announcements are closely watched by pretty much everyone, and that’s hardly a surprise: the $3 trillion tech giant sits at the centre of the AI boom. And the latest quarter delivered another solid report: the chipmaker beat sales and profit expectations for the seventh consecutive quarter – with both rising more than 120%. Its forecasts for the current period were high too. However, its share price slumped after the update, suggesting that investor expectations and valuations have reached somewhat unrealistic levels, requiring earnings that greatly exceed expectations – not just above average ones.

Berkshire Hathaway became the first non-tech company to top $1 trillion in market value – a milestone that happened to coincide with chairman and CEO Warren Buffett’s 94th birthday. Berkshire’s share price is up about 30% this year – outperforming the S&P 500’s 17%, despite the fact that the firm is holding about $276.9 billion in cash – invested mostly in short-term US Treasuries that return only about 5% a year. Investors have high hopes for the conglomerate: they’re optimistic that an improving economy will benefit its diverse holdings and they see higher prices on home insurance – one of its major operating businesses – as having a positive impact on its bottom line.

Nvidia, Apple, and Microsoft were all said to be in talks to raise fresh funds that would value ChatGPT-maker at more than $100 billion, up from roughly $86 billion now. The new funding round – led by venture capital firm Thrive – would give OpenAI its biggest cash injection since Microsoft’s headline-grabbing $10 billion investment back in January 2023, and will help the company develop its next AI model, GPT-5. 

The Stoxx 600 – Europe’s benchmark stock index – hit a record high last week, boosted by some better news and a better mood across the continent. Eurozone inflation had dipped back to a three-year low, economic confidence gauges had ticked higher, and there was even a thawing of some trade tensions, as China dropped its plan to impose tariffs on French cognac. Now, the European Central Bank is expected to lower its key interest rate for a second time at its 12 September meeting.

The new UK government’s focus on boosting housing supply is expected to revitalise the residential lending market, with banks anticipating a surge in house building loans as planning reforms take effect. That increase in borrowing could lift sectors that have struggled with high inflation and labour shortages. Meanwhile, the UK property market is showing signs of recovery, with an increase in homes for sale and rising buyer demand, although high prices remain a concern. The broader economic improvement, supported by recent Bank of England interest rate cuts, appears to be boosting consumer confidence, but shoppers are still cautious. British retail prices recently dipped for the first time in nearly three years, partly due to subdued spending and cautious retailers. Burberry’s likely exit from the FTSE 100 highlights the challenge retailers face alongside broader economic pressures, including a slowdown in key markets like China. 

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