A hawk is born

Last week was a quietish one for markets. As of Monday’s close – markets were open yesterday in the US unlike the UK – global equities were up 0.1% in local currency and 0.5% in sterling terms. The US, UK and emerging markets all saw modest gains while Europe was down a little and Japan was up 2.0%, continuing its relatively volatile path of late.
Government bonds also ended the week little changed despite US Treasury yields edging higher on the back of a hawkish speech by Fed Chair Kevin Warsh. But yields have moved up further this morning with the 10-year UK gilt yield testing its May high of 5.2% and the 10-year Japanese yield reaching 3%, a 30-year high.

There have been developments in the war with Iran but they only seem to leave the state of play looking as murky and inconclusive as ever and oil prices are also broadly unchanged, with Brent crude currently around $92 per barrel.

Economic D-day scepticism

The week started with the US declaration of an Economic D-day against Iran which met with widespread scepticism. Indeed, China immediately threatened to retaliate if Chinese companies were included in the additional sanctions and there will be little desire to rock the boat ahead of the Trump and Xi meeting scheduled in Washington later this month.

Meanwhile, Iran and Oman supposedly reached a deal to reopen the Strait of Hormuz, only for the US and Iran over the weekend to exchange limited blows for the first time in a month in response to Iran apparently trying to lay new mines in the Strait which the US claims is now mine-free.

Some oil is now passing through the Strait although quite how much is difficult to know because of its clandestine nature. Estimates are around 6-8mbd compared with 20mbd before the conflict. It remains far from clear how soon flows will increase much further but so far the global economy has proven surprisingly resilient to the disruption and the latest numbers from India reinforced this point. Despite India being a heavy net oil importer, growth remained unexpectedly strong in the second quarter at 7.8%.

US interest rates outlook

Markets, however, were arguably more concerned last week with events in Wyoming than the Strait of Hormuz. After a distinctly underwhelming first few months as Fed Chair, Kevin Warsh took the opportunity at the annual central bankers’ get-together to regain some credibility with an unexpectedly hawkish speech.

Warsh described the US inflation numbers as concerning and fuelled expectations that rates could well be raised at the next Fed meeting on 17 September with his comment that ‘we must be confident that underlying inflation is moving to our objective, clearly and at sufficient speed… otherwise, we have work to do’.

Whether or not the Fed will raise rates later this month will no doubt depend in part on the payroll numbers released on Friday and the August inflation data out next week. But last week’s July numbers for the Fed’s favoured inflation measure only highlighted the case for raising rates.

The headline and core inflation rates were unchanged at 3.7% and 3.3% respectively, well above the Fed’s 2% target. Warsh’s relationship with Trump – who strongly believes rates are too high rather than too low – currently looks on course to sour even faster than it did for his predecessor.

ECB, Japan interest rates outlook

The European Central Bank had also been looking set to raise rates later this month and this morning’s inflation numbers for the Eurozone are unlikely to dissuade it. While the core rate edged down to 2.1% in August, the headline rate rose to 3.3%. The Bank of Japan also looks on course to raise rates this month with only the Bank of England looking likely to hold off until later in the year.

Nvidia’s results were the other main focus last week and once again they were stellar. They beat expectations and appeared to show no sign of the AI boom coming to an early end with the company forecasting 70% sales growth next year. Its share price duly ended the week up 6%. Meanwhile, Meta (Facebook) agreed to pay $18bn and implement measures to limit child usage to settle its legal battle with a host of US states over its failure to protect children. Its share price ended up 3%.

Back here in the UK, there was little news although Andy Burnham did pledge to take pressure off business in an attempt no doubt to quell confidence-sapping worries of tax hikes in the October Budget. Indeed, in a move which will relieve some of the pressure to raise taxes next month, Chancelor John Healey has apparently shelved the target to spend 3% of GDP on defence by 2030 – despite this being an issue he resigned over only in June.

This coming week, it is a quiet one on the macro front with the highlight being the US payroll numbers on Friday.

Rupert Thompson, IBOSS Chief Economist, part of Mattioli Woods

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