European stock markets rose yesterday, and Japan and South Korea hit fresh record highs overnight, but today the stronger pound is a bit of a drag on the FTSE 100’s multinationals. The blue chip index is down 0.2 per cent, with Frankfurt and Paris also in the red. Miners are boosting the index, but consumer stocks and those with a heavy US presence and dollar earnings, such as Rentokil, are dragging things down. Wall Street rose to fresh record highs following some positive comments on China trade talks from US President Donald Trump, and as investors look ahead to the start of the Federal Reserve’s two-day policy meeting today. The S&P 500 closed above 6,600 for the first time, while the Nasdaq climbed almost 1 per cent. Futures show the S&P opening up stronger later on today.
Tech stocks were largely positive yesterday, with Alphabet achieving a $3tn market cap level with a gain of 4 per cent. The company is announcing a multi-billion-dollar investment in the UK today as part of Donald Trump’s state visit. Tesla shares rallied after Elon Musk disclosed an insider buy worth $1bn, his largest ever purchase in the open market. Tesla has now erased its loss for the year, rising 85 per cent off its April lows. Microsoft and Apple both rose 1 per cent, while Nvidia was a shade lower after China accused the company of breaching monopoly rules.
UK jobs data this morning showed unemployment at a four-year high of 4.7 per cent, and crucially, a slowdown in wage growth as the jobs market cools. The number of vacancies fell while payrolls shrank by 142,000. The jobs picture is deteriorating, and the Bank of England should be cutting deeper and faster. Sterling, though, does not care about this because wage growth is still a little sticky despite falling, and the dollar is being offered ahead of the Fed decision. Cable this morning has pushed up to its best level since early July, clearing 1.3630, while the pound is much steadier against the euro, which made a thrust up to resistance at 1.18. Today’s wage inflation data also sets the tone for next year’s state pension increase, adding to Chancellor Rachel Reeves’ woes. More on that here
The action yesterday and today is likely mainly centred on traders being positioned for the expected rate cut on Wednesday. A lot of the market reaction will depend on how open the Fed seems to further cuts. It is all but certain the Fed will cut. We’ve detailed before the reasons why that may not be the case – payroll growth doesn’t have to be the same as it was 12 months ago because labour supply has shrunk, inflation is running hotter than the Fed would like, and chair Jerome Powell might just feel inclined not to bow down to the administration.
On the point of labour supply, estimates vary, but the ‘breakeven’ point of job creation, which is the number of new jobs needed to keep unemployment at the ‘right’ level. According to the St Louis Fed economists Alexander Bick and Victoria Gregory, the breakeven number of jobs that the US economy must create each month has come down from 155,000 in April to a range of 32,000-82,000, driven almost entirely by a large reduction in net migration. As I’ve kept saying, payroll growth does not need to come close to what it was a year ago. Assuming the Fed does cut tomorrow, I’d still anticipate it saying that the “extent and timing” of further policy adjustments will be dependent on incoming data, and not on a preset course. The market will choose how to take that. But…Fed cutting into US growth reacceleration could be positive for small caps. Gold has hit a fresh record on the anticipation of lower rates and higher inflation plus continued narrative around central banks swapping USD for gold. We should also note that the meeting takes place amid quite extraordinary circumstances – the administration failed in a last-ditch attempt to oust governor Lisa Cook before the meeting began. At the same time, US President Donald Trump’s pick Stephen Miran has been confirmed.
Speaking of Trump, he has called for US companies to abandon quarterly reporting and shift to a biannual model. Having to cover reports, I can say that’s something I and many like me could get behind. On a more serious note, the idea has plenty of merit – for instance, it could foster a change where management focuses its effort and not always on the next quarterly target. Instead, it could take a more measured, long-term view. However, it could increase share price volatility around earnings – it’s already quite high when companies report their results. It could also erode transparency for shareholders. The Trump show pulls into Windsor this week as he begins a second state visit.
By Neil Wilson, investor strategist at Saxo UK
