A recent statement by US Federal Reserve Chairman Jerome Powell has sparked a broad rally across risk assets. Powell’s comment, delivered at a central bankers’ symposium in Jackson Hole, Wyoming, highlighted a shift in the Fed’s policy focus. He noted that while inflation progress has been made, the Fed can now turn its attention to the labour market to ensure the economy sustains full employment. This move towards cutting interest rates, after a prolonged period of tightening, wasn’t unexpected but was welcomed by the markets.
US indices, particularly the Dow Jones and S&P 500, have continued to recover, approaching all-time highs despite a rough start to August. Light trading volumes saw retail investors flocking to equities, resulting in the highest inflows into US stocks in over a year. Interestingly, smaller capitalisation stocks and an equal-weighted version of the S&P 500 outperformed the traditional capitalisation-weighted index. This indicates that a broader range of stocks is driving the market’s growth, which is typically seen as a positive sign.
Investors also closely analysed the minutes from the Federal Reserve Open Market Committee’s July meeting. The minutes revealed that risks to achieving the Fed’s 2% inflation target have decreased. Some participants even suggested that the Fed could have supported a 25-basis point rate cut at that meeting, based on inflation progress and rising unemployment. The overall sentiment among investors was bullish, with money markets now pricing in a 100% chance of at least a quarter percentage point cut in September, and a potential 50-basis point reduction gaining traction.
On the macroeconomic front, the US government’s annual revision of jobs growth figures showed a significant downward adjustment, revealing that 818,000 fewer jobs were added than initially thought over the past year. This suggests that the domestic labour market may not be as robust as previously believed. Additionally, independent research indicates a sharp decline in bookings for travel-related services, suggesting that consumers are becoming more cautious and seeking better value for money.
Economic slowdown concerns are further supported by the Sahm Rule, an indicator that predicts recessions based on rising unemployment rates. This indicator has recently signalled a potential economic downturn, which is likely to catch the attention of the Fed, given its support for the Sahm Rule.
In the commodity markets, gold continues its upward trajectory, reaching new all-time highs. The value of a standard gold bar has now surpassed one million dollars, driven by global central banks’ record pace of accumulation.
Looking ahead, all eyes will be on the upcoming American second quarter GDP estimates and the Personal Consumption Expenditure (PCE) Price Index, the Fed’s preferred inflation measure. However, the spotlight will likely be on Nvidia, which is set to report its quarterly earnings on Wednesday. Nvidia, a key player in the semiconductor market, has seen its market capitalisation soar by three trillion dollars since the launch of chat GPT in November 2022. The company’s performance and the guidance on its next-generation Blackwell chip will be closely watched, with markets treating these results as a significant event for the broader technology sector.
The recent developments signal a possible shift in US monetary policy, with the Fed’s focus now balancing inflation control and employment stability. Investors are optimistic, and upcoming economic data and corporate earnings, particularly from Nvidia, will be crucial in determining the market’s direction in the near term.
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