Financial Update from Brewin Dolphin - 6 September 2024

September 2024

The Weekly Round-up

6 September 2024

In our latest weekly round-up, Guy Foster, Chief Strategist, discusses the U.S. Department of Justice’s investigation into Nvidia, U.S. consumer behaviour, and fresh economic data out of the U.S. and Europe.

The back-to-school week for markets concludes.

Generally, risk assets have slipped slightly. There was a little panic over the summer as consumer activity weakened. Some even speculated that the Federal Reserve (the “Fed”) would impose an emergency interest rate cut ahead of its next scheduled meeting.

Has a break on the beach settled the nerves or incubated the anxiety of your average investor? This week would provide some answers.

Nvidia under the spotlight

Last week, we discussed how investors were underwhelmed by Nvidia’s extraordinarily strong earnings. This week, they had to contend with the U.S. Department of Justice (DOJ) sending subpoenas to Nvidia and other companies, as it seeks evidence that the chipmaker violated antitrust laws.

It was known that the DOJ had been investigating the dominant provider of artificial intelligence (AI) processors, but this was an unexpected escalation, which caused volatility globally across several stocks operating within the chip-making ecosystem.

While the outcome of the investigation is obviously a concern for investors, the volatility likely reflects their anxiety about the broader issues surrounding the AI processor boom. Although these companies are making enormous sales at the moment, it’s uncertain how long the current surge in sales will last, and to what level they will revert when the cycle slows.

U.S. consumer woes

The second major anxiety for investors at the moment relates to the strength of the U.S. economy. We’ve talked in recent weeks about how the consumer sector has been holding up, with retailers in particular citing a change in behaviour, whereby consumers buy less or trade down to cheaper brands.

This week, Goldman Sachs held its Global Retailing Conference, and the message remained broadly the same. The discount store chain Dollar Tree painted a peculiarly graphic picture of its average customer – a low-income family also holding a second job, where those additional hours seem to have gone away or be on the wane.

So, consumer-facing companies have reported some weakness, which seemed at odds with some of the economic data.

This week, we’ve seen a bit more evidence these companies’ experience is broadly shared. The Fed produces a report called the Beige Book. It’s similar to the Bank of England’s Agents’ report – a summary of anecdotal interviews with key business contacts, which contrasts with the statistical data investors spend time trying to interpret. This showed economic activity growing slightly in just three (out of eight) districts. It told of employers generally maintaining employment but cutting labour costs by reducing extra hours or not replacing job leavers. The tone was downbeat but not alarming, and there was a large regional variation.

We learnt the number of job openings declined (again). It remains high, but less abnormally so. This week’s purchasing managers indices showed the U.S. manufacturing sector was contracting.

Today saw the final and most anticipated piece of the puzzle, the U.S. employment (non-farm payroll) report. Like much other data this week, headline jobs growth was weak. It also included negative revisions to previously reported data, which perhaps helps explain why companies seemed to report weakening activity levels before they were evident in the economic statistics.

Putting these data together, the case seems pretty good for a double (half percentage point) interest rate cut when the Fed meets in two weeks’ time. Some commentators suggest this could unsettle the markets, but the Fed has asserted for months that policy is very restrictive.

We’ve discussed how the Fed needed inflation data to turn before it could justify a cut. Now that the data finally supports its assertion, it seems entirely plausible it should want to reduce that degree of restrictiveness significantly.

Not all bad news

Soft-landing hopes remain intact because although jobs growth was weaker than expected, when coupled with decent earnings growth, it underpins that growth still looks good for the current quarter. And even though the manufacturing sector purchasing managers index (PMI) may be experiencing a recession of sorts, the much more significant service sector PMI was pretty strong.

That wasn’t just a U.S. phenomenon. In Europe, the Eurozone and UK both saw robust expansion in service sector activity. There were weaknesses though, with Germany remaining a weak spot within Europe.

I think the European Central Bank will cut rates again next week, particularly as it had some good news on the inflation front; the measure of compensation per employee, which it uses as a gold standard measure of wage inflation, slowed further in the second quarter.

In the UK, the economic news continues to be strong as the economy rides on the waves of tax cuts and wage increases. Therefore, the Bank of England can probably afford to leave rates unchanged when it meets in two weeks’ time.

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