As if it were needed, a poorer than expected manufacturing report and some weakness in mega cap technology stocks added extra focus to the imminent Fed Chair speech at the Jackson Hole symposium later today.
While there was a signal that service sector activity could be accelerating, the contraction within manufacturing was enough to unsettle investors. There had been few clues arising from the weekly jobless claims report which was in line with expectations, forcing investors to revisit some of the events from earlier in the week. The Labor Department’s downward revision of jobs added implied that the slowdown may have actually started earlier than expected, while comments from the latest Fed minutes were perhaps the clearest signal yet that easing was on the cards.
Indeed, the vast majority of Fed participants agreed that it would likely be appropriate to ease rates at the next meeting in September, should the data continue to come through as expected. The debate remains over the scale of any such cut and, while the market is almost unanimously agreed that one is coming, the likelihood is currently veering towards a reduction of 0.25% rather than a more aggressive 0.5%.
Markets drifted on this lack of clarity, in addition to which there was some notable weakness elsewhere. It appears that so goes Nvidia (NASDAQ:NVDA), so goes the tech sector and a near 4% drop in the price of the market darling was enough to depress both the S&P500 and Nasdaq indices. Despite a perky start to the session, gains evaporated as nervousness ahead of the Jackson Hole statement took on extra momentum. Even so, the losses did little to mar the cumulative performance of the main indices, with the Nasdaq having added 17.4%, the S&P500 16.8% and the Dow Jones 8% in the year to date.
Asian markets were mixed overnight, with Japan remaining the centre of attention and nudging higher after a tentative start. Bank of Japan comments that interest rates may rise gradually depending on whether the forecasts wash through as anticipated, but in any event would be on a gradual basis, were calmly received. The news provided some support to the yen and followed an unchanged consumer price inflation reading, and a core reading which rose from 2.6% to 2.7%.
Indeed, so far the careful management of rates is becoming more evident, despite being seen as a catalyst for some violent swings in the Nikkei earlier in the month as the carry trade was unwound in abandon by many investors. So far, negative rates were neutralised in March with a small hike in July, with the Governor having been at pains to highlight that it would step away until the market volatility had subsided, leading to a consensus that any further rise would not be on the table until the end of the year.
Largely free of the technology exposure which hampered Wall Street, the UK’s premier index moved ahead in early trade. Further strength in the gold price led to gains in miners with a particular exposure such as Fresnillo (LON:FRES) and Endeavour Mining, while some stability in the oil price lifted the oil majors. The oil price itself is now flat for the year, with the perception of weak Chinese demand and the possibility of supply-side easing following a potential slowdown in the Middle East conflict being the main drivers.
For the main indices and the premier index in particular, there has been growing evidence of warming sentiment over the course of the year, latterly driven by the perception of political stability which has added to the strength and durability of many FTSE100 constituents. The index remains cheaply valued on both a historical basis as well as compared to many of its global peers, with an incremental level of overseas buying interest beginning to wash through. In the meantime, the FTSE100 is now ahead by 7.5% in the year to date, and less than 2% away from the earlier record high recorded in May, while the FTSE 250 has risen by 7.2%, with an increasing amount of M&A activity given lowly valuations and a largely resilient UK economy each playing their part.