Weekly house view | Inflation anticipation
The week in review
The S&P 5001 rose by 3.6% over the week, reaching a new all-time high. As well as ongoing fabulous earnings momentum (with most companies now having reported, 84% of constituents beat estimates and growth in earnings per share has been 50.3%) and positively interpreted economic data, this reflected some settling of investor positioning after the forced deleveraging of the Situational Awareness hedge fund. Indeed, on a single day last week more than four million S&P 500 call options were purchased – a record volume for these typically bullish instruments – while trading in more defensive put options remained at average levels.
Further potential pressure was relieved when US Treasury Secretary Scott Bessent proposed a relatively obscure facility to let Japan use its Treasury holdings as collateral to borrow dollars for supporting the yen; this avoided Japan needing to sell Treasuries, which could have raised yields and been another risk-off catalyst across markets.
Geopolitical developments were again nuanced: Oman and Iran reportedly made progress on a deal for ships to navigate the Strait of Hormuz under coordinated traffic management with 60-day toll-free transit, which would pave the way to US/Iran renegotiations, but it was not clear if Iran would ban US and Israeli ships. Houthis meanwhile attacked Yemen’s government and Najran in Saudi Arabia.
In US domestic politics, a progressive candidate won the Democratic Senate primary in Michigan, which may make it more challenging for the party to retain the state in November’s mid-terms and thus win control of the Senate.
Quote of the week
“We’re seeing more of a C economy where the lower end of wage earners are finally calling it back,” Bessent argued, rejecting the idea of a K-shaped economy in which the fortunes of the richest and poorest diverge.
Key data
Mixed evidence for this thesis came from the monthly jobs report: nonfarm payrolls fell by 23,000 in July at the headline level, with the May and June figures also revised down by a combined 103,000, but the weakness was concentrated in government employment while 30,000 private-sector roles were added.
The unemployment rate dropped to 4.1%, primarily because labour-force participation declined to a 50-year low, and wage growth was contained at 0.1% month on month. Markets did not worry, focusing instead on the supportive implications for softer inflation, payback of temporary World Cup gains from earlier this year, and the ISM manufacturing indicator climbing to a five-year high.
In China, the RatingDog Manufacturing index suffered its largest fall on record and the country’s price indices also came in weaker than expected, with global investors taking some comfort from China continuing to export deflation to the rest of the world.
