Nick Spencer-Skeen, Senior Executive Officer, Lunaro Markets Limited
Friday Closing Prices
- S&P 500 7,757 (+0.62%)
- Nasdaq 26,691 (+1.30%)
- Gold $4,342 (+2.39%)
- Brent Crude Oil $82.37 (-0.87%)
Global equities pushed to record highs last week, although the path there was anything but smooth. The S&P 500 closed at a fresh record, the Dow briefly cleared 54,000, and the Stoxx 600 also reached new highs.
Despite the index performance, under the hood, there was broad divergence at the sector level. For example, the AI trade remained highly selective. Palantir surged after another strong quarter, while AMD and parts of the semiconductor and memory complex came under pressure as investors continued to question the elevated capex guidance and just how quickly AI spending will translate into earnings.
The week ended with a much larger macro surprise. US July Nonfarm Payrolls unexpectedly fell by 23,000 versus expectations for an 83,000 increase, taking the three-month average to just 20,000.
Unemployment fell to 4.1%, but largely because participation dropped to 61.4%, its lowest since February 2021. In the immediate aftermath before the markets closed for the weekend, the report pushed expectations for the next Fed hike further out. It also saw 2-year Treasury yields fall and the US dollar weaken.
Elsewhere, gold delivered a strong rebound week and surged 6.5%. Oil gained 3.2% as Iran and Strait of Hormuz risks remained elevated, and the Nikkei rose 2.6% as concerns around further Japanese FX intervention faded.
The Bid Returns to Gold
Gold recorded its best week since January, with the biggest help coming through US rates. Throughout the week, and particularly following the unemployment report on Friday, traders reduced expectations for an interest rate hike this year from the Fed. Since gold pays no interest, the reduced opportunity cost of holding gold versus the US dollar pushed the price higher, improving the relative appeal of the non-yielding asset.
Flows also became more supportive. Gold-backed ETFs have added roughly 24 tonnes since holdings bottomed around July 20, marking their strongest stretch of buying since April. That is important after several months in which central-bank demand remained supportive, but other buyers were notably absent.
The price action suggests the rally was broader than a simple geopolitical hedge against the continued tensions in the Middle East.
Given the week ended with further gains following the weak US data, traders will likely be following the price action on Monday closely to see if momentum continues.
Inflation Gets The Next Say
US inflation returns to centre stage on Wednesday, with the July Consumer Price Index (CPI) likely to determine whether Friday’s weak employment report genuinely changes the Fed outlook. Headline inflation is expected to ease slightly to 3.4% year-on-year from 3.5%, while core CPI is forecast to rise around 0.2% month-on-month after being unchanged in June.
When we look back at June’s surprisingly soft report, it was heavily influenced by a 5.7% decline in energy prices, including a 9.7% fall in gasoline. Core inflation slowed to 2.6% year-on-year. Therefore, this time around, traders will be watching whether underlying services and shelter inflation remain contained as some of that energy volatility washes through.
The stakes have increased considerably following Friday’s payroll report. A benign CPI print would strengthen the argument that the Fed can remain patient, likely supporting bonds, gold, and rate-sensitive equities while weighing further on the US dollar.
A meaningful beat would be more disruptive. After all, it would leave the Fed facing softer employment alongside persistent inflation, which would present a difficult combination for policymakers to manage.
Fed Divisions Grow
Another risk event to watch this week is chatter from Fed members, given the growing divide over how quickly the central bank should respond to inflation that remains well above target.
After three voters dissented in favour of a 25bp hike at the July meeting, several colleagues have been more vocal this week about moving closer to this position.
Kansas City Fed President Jeff Schmid said bringing inflation back to 2% would require “tighter policy.” Even officials supporting the July hold sounded increasingly uncomfortable. Governor Lisa Cook said the Fed does not have the “luxury” of waiting indefinitely and is prepared to raise rates if inflation fails to cool. Philadelphia Fed President Anna Paulson kept an “open mind,” saying the answer could ultimately be higher rates or simply holding current rates for longer.
With other speakers due this week, even unplanned remarks following the CPI print could impact markets, as traders continue to try to get some guidance on how soon a rate increase could occur.
