Daily market review
Federal Reserve prioritises inflation as China’s factories move closer to growth
The US central bank put price stability firmly back at the top of its agenda on Friday, lifting Treasury yields. China’s factories showed improvement on Monday morning, but weak services and rising input costs still fall short of a broad global recovery.
This week’s central question
Can strong earnings and improving manufacturing offset inflation that keeps interest rates high?
Opening thesis for the week. Two forces are colliding on Monday. Nvidia’s earnings and China’s factory orders show that demand is still present, while 3.7% US inflation, higher bond yields and energy-led European price pressure reduce the chance of an early fall in financing costs. The week will turn on whether labour-market and inflation data confirm growth without another acceleration in prices.
Challenges the thesis: US consumer-spending prices rose 3.7% over the year, and more than half of the price basket increased by over 3%
Next answer: euro-area August inflation on 1 September and the US August employment report on 4 September
01 United States, inflation and rates
The Federal Reserve put inflation first, leaving bonds and growth shares exposed to higher-for-longer interest rates
Facts
On Friday, Kevin Warsh, chair of the Federal Reserve, the US central bank, said policymakers’ predominant focus should now be prices. The Personal Consumption Expenditures Price Index (PCE), which measures prices paid for goods and services bought by US consumers, rose 3.7% over the year to July, while its six-month annualised rate reached 4.1%. As many as 54% of the index’s 199 components increased by more than 3%. The same day, the two-year US Treasury yield rose from 4.20% to 4.34%, while the ten-year yield moved from 4.67% to 4.73%.
Why it matters
The Federal Reserve’s 2% inflation objective remains well below current price growth, while the labour market is, in the chair’s assessment, close to full employment. That gives the bank less reason to cut its 3.50–3.75% policy-rate range quickly. Higher rates for longer raise the cost of mortgages, corporate debt and investment projects, while reducing the present value of profits expected far into the future.
Portfolio impact
Shorter-maturity US bonds and money-market instruments can continue to offer relatively attractive income. Longer-maturity bonds, richly valued technology shares, smaller indebted companies and property remain more vulnerable to rising yields. For a euro-based investor, the US dollar is an additional force: a stronger dollar may offset part of a price decline, while a weaker dollar would magnify it when returns are translated into euros.
Opportunity and risk
The opportunity is an economy whose earnings and investment grow quickly enough for companies to absorb a higher cost of debt. The main risk is another acceleration in inflation that forces the central bank not merely to hold rates, but to raise them. The next catalysts are US job-openings data on 1 September and the employment report on 4 September. Weaker figures would ease yield pressure; stronger ones could extend it.
02 China, manufacturing and commodities
China’s factories moved closer to stability, but weak services and rising input prices limit the case for a broad recovery
Facts
On Monday morning, China’s National Bureau of Statistics reported that the manufacturing Purchasing Managers’ Index (PMI) rose from 49.2 to 49.8 in August. The survey combines signals from orders, production and employment: a reading above 50 usually indicates expansion, while a reading below 50 indicates contraction. The production index reached 50.4, new orders 50.6 and new export orders 50.1. Services remained at 49.3, construction at 46.9 and small companies at 47.9, however, leaving the composite output index at only 49.5.
Why it matters
New orders above 50 show that factory demand is recovering from July’s weakness, but the economy as a whole has not yet moved into expansion. The input-price index also jumped from 53.2 to 56.6, while the output-price index rose from 47.8 to 50.4. If manufacturers cannot pass all of these costs to customers, profit margins will fall. If they can, some of the pressure will feed into global goods inflation.
Portfolio impact
Improving factory orders may benefit industrial metals, Asian exporters, European equipment makers and logistics companies. Weak services, construction and smaller businesses remain risks for exposure to Chinese domestic consumption and property. Rising commodity costs can support energy and materials producers, but put pressure on manufacturers and transport companies. They may also weigh on bonds if investors expect a renewed inflation impulse.
Opportunity and risk
The opportunity is a continued recovery in orders that spreads from larger and high-technology manufacturers to services and smaller companies. The risk is a short inventory-restocking cycle without durable final demand, especially while construction remains below 50. China’s next activity releases will show whether the 50.6 new-orders signal becomes actual production, and whether cost inflation produces higher selling prices or merely thinner profit margins.
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03 Europe, energy and purchasing power
Europe’s energy-led inflation is accelerating again, so weaker growth does not yet guarantee lower interest rates
Facts
National releases on Friday showed uneven but clearly energy-led price pressure. Spain’s annual inflation rate rose from 3.6% to 4.3% in August, while its European Union-harmonised measure reached 4.5%. France’s inflation rate increased from 2.1% to 2.4%, with energy prices up 16.7% over the year. German import prices rose 6.8% in July and imported energy cost 26.4% more. Lithuania’s provisional harmonised August inflation estimate rose to 5.8%, compared with the final 5.4% July rate, although a complete cross-country comparison for August is not yet available.
Why it matters
More expensive fuel and electricity first raise headline inflation and later add to transport, manufacturing and some service costs. The European Central Bank’s July meeting account warned that the full energy shock had not yet passed through and that another interest-rate increase might be needed if the inflation outlook did not improve. It is a difficult combination: higher prices weaken consumption, while higher interest rates increase borrowing costs.
Portfolio impact
Energy companies and shorter-maturity euro interest-rate instruments may prove more resilient if energy prices and central-bank rates remain high. Longer-maturity bonds, property companies, retailers and energy-intensive manufacturers face greater pressure. For Lithuanian households, 5.8% inflation reduces the real value of savings and income, so the outlook for consumer businesses depends partly on whether wages continue to catch up with prices.
Opportunity and risk
The opportunity is stabilising energy prices that allow underlying inflation to keep slowing and reduce the need for another rate rise. The risk is a second round in which transport and manufacturing costs pass into services and wages. The next catalyst is the euro area’s provisional August inflation estimate on 1 September. It will show whether the Spanish, French and Lithuanian readings form a broader regional pattern.
04 Technology, earnings and investment
Nvidia’s earnings confirmed the scale of artificial-intelligence investment, but high rates raise financing and concentration risks
Facts
Quarterly results published on Wednesday by Nvidia, the largest supplier of chips used for artificial-intelligence computing, remain an important backdrop for Monday’s markets. Revenue reached $96.2 billion, up 18% from the previous quarter and 106% from a year earlier. Data-centre revenue rose 117% to $89.0 billion, while gross margin was 75.0%. The company expects approximately $108 billion of revenue next quarter. That forecast excludes China data-centre computing revenue.
Why it matters
The figures confirm that artificial-intelligence infrastructure is already generating very large revenue for chip and data-centre suppliers. The build-out also requires enormous amounts of capital: Nvidia described partnerships intended to mobilise more than $500 billion of third-party funding. The longer interest rates stay high, the more expensive it becomes to finance power, networks, buildings and cloud capacity, which raises the return investors must ultimately earn.
Portfolio impact
Demand can support semiconductor, optical-networking, electrical-equipment, data-centre and cloud-service companies. The other side is concentration. One direct customer represented 16% of Nvidia’s quarterly revenue, while six-year cloud-service commitments totalled $36 billion. Richly valued technology shares and their suppliers therefore remain sensitive to bond yields, slower customer investment and restrictions on sales to China.
Opportunity and risk
The opportunity is broader productivity growth in which artificial intelligence lifts not only chip sales, but also revenue and margins across other industries. The main risk is excess infrastructure or end-customer returns that arrive too slowly to cover expensive financing. The next signals are cloud providers’ capital-spending plans, delivery against Nvidia’s $108 billion guidance and evidence that revenue growth is spreading beyond a small group of very large customers.
Today’s portfolio compass
Growth is still present, but its financing cost matters again
Two forces connect today’s stories. Nvidia’s 106% revenue growth and China’s 50.6 new-orders index show that investment and manufacturing demand have not disappeared. Yet 3.7% US inflation, higher Treasury yields and Europe’s energy-led price pressure mean that debt and capital projects are unlikely to become much cheaper soon. This favours companies that already generate strong cash flow and shorter-maturity interest-rate instruments, but increases the risk for leveraged property, smaller companies and highly valued growth shares. The counterweight is that China’s broader economy and Europe’s underlying inflation do not yet point to an unequivocal new surge in prices.
Important. This is a general market commentary, not personalised investment advice. Market and company data can change, and investments can fall in value.
