Nick Spencer-Skeen, Senior Executive Officer, Lunaro Markets Limited
Friday Closing Prices
- S&P 500 7,786 (-0.17%)
- Nasdaq 26,729 (-0.28%)
- Gold $4,377 (+0.59%)
- Brent Crude Oil $88.49 (+1.88%)
In the Week Ahead, we spoke last week about how much market focus was on US Federal Reserve (Fed) monetary policy. Indeed, the dominant macro story did prove to be the material repricing of the Fed outlook, as benign US Consumer Price Index (CPI) and Producer Price Index (PPI) data combined with softer activity indicators.
September hike expectations collapsed from above 70% at the end of July to 31.8%, with markets pushing back on when the next hike could come. July retail sales reinforced the shift, falling 0.6% month-on-month, while consumer sentiment declined for the first time in three months. Fed speakers broadly endorsed patience, although stopped short of declaring victory on inflation.
The cross-asset reaction was clearest in US rates. The 2-year Treasury yield fell 7bps to 4.17%, while the 10-year declined just 1.5bps to 4.69%, producing a notable curve steepening.
Longer-dated bonds remained pressured by fiscal concerns, as noted elsewhere, with UK and German yields also moving higher.
Equities broadly absorbed the weaker economic data well. The S&P 500 gained 0.4% for a third consecutive positive week, while the Nasdaq 100 rose 1.4%. Sandisk’s strong guidance reignited enthusiasm around AI memory demand, helping the Nikkei outperform with a 2.6% gain. In contrast, the FTSE 100 fell 1%.
FX reflected the softer Fed outlook, with the dollar modestly weaker and EM currencies reaching a record high. USD/JPY remained near 159 despite increased Bank of Japan hike expectations.
Finally, oil edged higher as Iran-related tail risks eased but refined-product shortages persisted, while gold slipped 0.3%, continuing to show signs of exhaustion despite the more supportive US rates backdrop.
Inflation Buys the Fed Time
US inflation remains the hot story going into the week, with multiple data points offering the Fed some breathing room. July CPI rose 0.1% month-on-month and 3.4% year-on-year, while core CPI increased 0.2% and 2.5% respectively. Shelter rose just 0.1% and accounted for roughly two-thirds of the monthly increase, while a 1.5% fall in energy prices helped contain the headline measure. The report therefore reinforced the view that the sharp inflation acceleration seen earlier this year is losing momentum.
PPI delivered a similar story. Producer prices were unchanged in July, versus expectations for a 0.2% rise, as a 0.7% fall in goods prices offset a 0.2% increase in services. Annual PPI nevertheless remains elevated at 4.7%, while the measure excluding food, energy and trade services rose 0.4% on the month, showing that underlying pipeline pressures have not disappeared.
Taken together with July’s weak employment report, the data weaken the case for an imminent Fed hike. From our perspective, the key distinction is that inflation is cooling enough to buy the Fed time, rather than falling quickly enough to declare victory.
Reading Between the Lines
Wednesday sees the release of the meeting minutes from the Fed’s July meeting, which is arguably the biggest market event of the week.
Traders should get a better look at how divided the Fed was at the meeting, when policymakers voted 9-3 to leave rates unchanged at 3.50%-3.75%6. The main focus will be the strength of the hawkish camp. Three voters preferred an immediate 25bp hike, while other officials have since indicated they also saw a case for tighter policy.
Markets will look for how broadly policymakers worried that inflation was becoming entrenched, and whether officials viewed policy as sufficiently restrictive. Equally important will be the discussion around labour-market risks and conditions required for a September hike.
It’s true that the minutes are backwards-looking, and happened before the inflation reports came out. Therefore, any information needs to be taken with a pinch of salt. Still, evidence that support for higher rates extended beyond the three dissenters could keep year-end hike expectations alive.
Alibaba’s AI Moment
Alibaba earnings on Thursday provide the next good barometer for the AI thematic, with a company release late last week raising eyebrows. Its growing position in global AI is evident, as it announced its Qwen family of open-weight models has surpassed 3 billion downloads in just six months, while Alibaba has released more than 460 models and developers have created over 300,000 derivatives. Qwen is now comfortably ahead of Google and Meta on 2026 open-model downloads, suggesting Alibaba is becoming an increasingly important building block for developers beyond China.
As with most AI-related earnings this season, the question for investors is how quickly that adoption translates into revenue. Cloud will remain the key focus after revenue grew 38% year-on-year last quarter, while AI-related products accounted for roughly 30% of external cloud revenue and continued to deliver triple-digit growth.
Management expects that share to exceed 50% within a year and has already said spending will surpass its existing three-year AI investment commitment.
If Alibaba can convert Qwen’s rapidly expanding ecosystem into accelerating cloud growth, it bodes well for the sector.
