Markets are waiting for interest rate news

Key takeaways

Stock markets enjoyed speculation that more interest rate cuts could soon be on the way in the world’s most dominant economy.

Interest rate cuts could be imminent in the US
During a speech at an economic conference, the head of the US Federal Reserve – Chair Powell – hinted that his central bank could cut interest rates in September. The news pushed stock market prices higher as investors looked forward to the effect of interest rate cuts, including a potential boost to economic activity. Bond prices also increased, while bond yields (which always move in the opposite direction to prices) fell. Powell’s speech was not a firm commitment to cut rates, but financial markets are now very expectant.

High prices and low economic growth present a UK conundrum
At the same conference, Governor Bailey – the head of the Bank of England – also highlighted his concerns about the UK’s ‘acute challenge’ when it comes to economic growth. News emerged last week that UK inflation had risen again, with transportation and travel costs, as well as higher food prices, pushing inflation higher. This news could reduce the likelihood of another Bank of England interest rate cut this year, as the Bank must consider pricing pressures as part of its mandate. Given that the Bank must balance inflation concerns with economic growth priorities (which would normally lead to rate cuts), this is a challenging situation for the Governor and his policymaking committee.

Good news at last for European manufacturing
New orders placed with European manufacturers increased in August, according to the latest private sector survey data (the Purchasing Managers’ Index, or PMI). This sign of growth moves the PMI figure for Europe’s manufacturing sector out of contractionary territory for the first time in three years. While this is a positive sign for economic growth, inflationary pressures are edging higher in Europe too, reducing the chances of more rate cuts by the European Central Bank.

Market moves

• Prices in both stock and bond markets broadly rose last week, in expectation of interest rate cuts at the US central bank in September.

• The US dollar weakened slightly versus its international peers.

What to look out for this week

• Among the economic data set for release this week, investors will be especially interested in the Personal Consumption Expenditures (PCE) figures for the US. PCE is the US central bank’s preferred gauge of inflation, so a gentler reading could add weight to calls for interest rate cuts in September.

• The latest earnings report from technology giant Nvidia will be issued on Wednesday and could provide interesting insight into the outlook for the tech sector.

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