We are quite used to explaining how inflation, GDP or labour market data influences markets, however this week markets initially reacted to US manufacturing data.
Manufacturing Purchasing Managers’ Index (PMI) is a measure of the economic trends in the sector. Manufacturing in the US has been weak of late, but market expectations were that there would be a slight increase towards expansion in the sector, however this was not the case as the report came in at 47.2, lower than expected and indicated further contraction. This is the fifth straight month the manufacturing sector has remained in the contraction zone; albeit a bump up from July’s 46.8 reading, despite the decline in new orders and supplier costs rising. The data led to markets questioning the extent of the imminent US Fed interest rate cut, which would help to stimulate economic growth in sectors again. The S&P 500 and Nasdaq suffered big falls on the day, down 1.7% and 3% respectively. Nvidia seemingly took the biggest hit on the day as it closed down by 9.5%, erasing $278bn in market cap, the largest one-day company decline in history.
Regarding manufacturers, German car company Volkswagen (VW) is facing a dilemma. Over history, previous CEO’s have been fired for attempting to cut jobs, and current CEO Oliver Blume is facing the same test as he announced the potential closure of factories. There have been two specific factories earmarked to be closed as they are running significantly below capacity, however, thousands of employees are not happy and are expected to protest next week. VW’s global market share has been falling as electric and hybrid car demand expands and the “bloated monster” needs to cut costs.
Tesla has enjoyed a successful week in markets as they announced plans to launch their “full self-driving” (FSD) product in Europe and China. The full self-driving will be an upgrade to the Tesla autopilot that is currently available to drivers and if regulators can be convinced, this will be a significant boost to Tesla profit margins, charging customers an extra $12,000 on their purchase. Tesla shares have surged almost 10% for the week.
On Wednesday, we saw the Bank of Canada (BoC) continue their interest rate journey as they cut rates down to 4.25%. Their first-rate cut was in May where they lowered rates from a 20 year high of 5% and have since cut rates by 25bps (0.25%) each meeting. It seems they are not stopping there as BoC Governor Tiff Macklem, opened the door for further cuts stating, “if inflation continues to ease in line with forecasts, it is reasonable to expect further rate cuts”.
A new French prime minister has been appointed this week, two months following the snap election that caused a political shakeup. Michel Barnier was the European Union’s former Brexit negotiator and has now been tasked by French President Macron, to unify the government. Over his long career, Mr Barnier has been considered a centrist, however in his bid to become the president in 2022 he swayed towards the right side, hardening his stance on immigration. At the age of 73, he also becomes France’s oldest prime minister.
Readers may well have noticed lower fuel prices recently, driven by recent falls in the oil price. US Crude oil is now below $70 a barrel, on the back of strong supply and expectations of weakening demand as economies slow.
As is customary, US Non-Farm Payrolls data was released today, the First Friday of the new month. Following on from last month’s reading, the jobs data undershot expectations with 142,000 jobs created in August, strengthening the case for a 0.5% cut by the US Fed later this month. The underwhelming data led to bond markets rallying as yields dropped (prices rose) on the back of the news. We’ve written extensively about our comfort in holding government bonds in portfolios currently, and we continue to believe the asset class can help stabilise portfolios should economic growth disappoint.
September is historically a tricky month for equities, and so far this trend is continuing. While equities have pulled back, we have witnessed strength in government bonds. With key inflation data and central bank meetings to come this month, there is plenty of news flow that could impact markets in the short-term.
Nathan Amaning, Investment Analyst
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