Weekly house view | Goldilocks again ?

A batch of US economic reports last week cheered investors looking for signs of a “Goldilocks” scenario, where activity slows enough to keep further interest rate hikes at bay without pointing to recession. With the earnings season over and the next Federal Reserve policy meeting not until 19/20 September, data is taking centre stage for markets. This week, we will watch the ISM services index on Wednesday to see if the sector remained in expansionary territory in August. Last week’s figures showed the US economy’s underlying resilience, but with signs higher rates are starting to affect its weaker areas. Employers added 187,000 non-farm sector roles in August, though the two prior months were revised down. The jobless rate rose to 3.8% from 3.5%. The Fed’s preferred measure of underlying inflation saw the smallest back-to-back increases since late 2020. A leading electric vehicle maker cut prices on some of its models by up to 19%. Consumer spending rose 0.8% in July but personal income grew just 0.2% as households run down excess savings. We expect the Fed to keep rates on hold in September. Equity markets rebounded on last week’s data, driven by megacaps, which were boosted by falling market rates. US equities remain highly valued and we are more upbeat on other regions.

In Europe, August euro area headline inflation was unchanged at 5.3% year-on-year. Core inflation eased slightly to 5.3% from 5.5%. ECB hawks will likely push for a last hike in September. We expect a 25 bps hike in the deposit rate to 4%, this month. In the UK, house prices fell 5.3% annually in August as higher rates bite. In Switzerland, mixed survey data pointed to an economic slowdown. Swiss inflation held steady in August at 1.6% year-on-year, while core inflation eased to 1.5% from 1.7%. We expect one last 25 bps rate hike by the SNB in September, to 2%.

In China, the official purchasing managers’ index rose in August, beating market expectations but remaining in contraction territory. Recently announced Chinese policy measures aimed at stabilising growth include cuts to the minimum down payment for mortgages and lowering rates on existing mortgages. A cut to a levy on share trading aims to stimulate the equity market and help restore consumer confidence. We are neutral on Asia emerging equities. September is historically a difficult month for equities with increased volatility. We note that last week’s coup in Gabon was the eighth in three years in West and Central Africa. Russia plans to cut oil exports by 300,000 barrels per day in September, and that Saudi Arabia and Iran were invited to join the BRICS – a move that would boost group of emerging economies’ hold on oil markets. We are positive on oil.