European stock markets were broadly higher on Friday morning, but the FTSE 100 has fallen further back from its attempt to reach a record and is dropping toward the 10,700 level. The oil price is on the up again despite both sides claiming the Strait of Hormuz closure is being bypassed, and the war of words continues to stoke tensions and rattle the nerves.
US defense secretary Pete Hesgeth said the US can keep the Strait shut “indefinitely”, and crude prices have tracked higher overnight into this morning’s session to rise about 3 per cent from the lows yesterday.
Despite this, the S&P 500 added 0.65 per cent yesterday to hit a record closing high of 7,798.99, while the tech-heavy Nasdaq Composite rose 0.81 per cent. There are growing signs of fresh confidence in the AI trade and the market is rotating positively once again. The proxy for the AI hardware trade is the South Korean Kospi index given the dominance of chip stocks SK Hynix and Samsung Electronics. It extended its gains after entering a technical bull market on Thursday, rising another 2.4 per cent overnight. Software stocks – badly beaten up in the first quarter on a broad AI fear trade have also rebounded.
US Treasuries fell as a 30-year bond auction went up at the highest yield since 2001. Not a great surprise, given last month’s Federal Reserve decision and the jump in the deficit. Investors want compensation for duration for a lot of reasons. Fiscal fragility is one, but so too is a reassessment of just how tough the Fed is going to be on inflation.
The headline personal consumption expenditure (PCE) inflation print is expected to be around 3.7 per cent, down from the 4.1 per cent peak in May, but the all-important core index for July seems to be heading for a gain of 0.3 per cent on the month and 3.3 per cent year-on-year. In other words, hot and sticky. Softer economic data may have been a bit cooler, but this won’t change the minds of the hawks on the Fed committee, and it’s not been cool enough to indicate that PCE is about to roll over, which means the rest of the FOMC could come around to a September hike.
Rising long-end rates is the last thing the Fed wants, but that is exactly what we’ve had since the FOMC’s July meeting because the market decided chair Kevin Warsh wasn’t going to act and because CPI cooled. But with the deficit rising and inflation sticky, the Fed may decide that the bear steepening requires a re-anchoring of the front end in September to flatten the curve, jacking up the front end and bringing in the long.
Today sees US July retail sales, with consensus near 0.2 per cent to 0.3 per cent on the month and a 0.2 per cent rise excluding autos, followed by the preliminary August University of Michigan sentiment survey and the consumer inflation expectations survey. Year-ahead inflation expectations ticked down from 4.6 per cent in June to a still-elevated 4.2 per cent in July.
By Neil Wilson, investor strategist at Saxo UK
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