Markets await September US rate cut

The release of the minutes of the Federal Reserve’s (Fed’s) last policy setting meeting hardened expectations of a rate cut when the US central bank meet in mid-September. Fed Chair Jerome Powell is due to speak at the central bankers’ symposium at Jackson Hole in Wyoming later on Friday, and markets will be scrutinising his words for any policy clues

The gold price hit another new record high – and oil prices weakened on concerns about future demand as the US and Chinese economies weaken. There was a significant downward revision to US jobs data, which offset a sharp drop in US oil inventories.

Markets generally moved high over the week, but the FTSE 100 traded flat.The blue-chip index was down 0.1% by mid-session on Friday, with the more UK-focused FTSE 250 trading up 0.3%.

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Podcast

Rachel Reeves’ spending review and the UK interest rate outlook. Charles Stanley Direct’s Chief Analyst Rob Morgan speaks to Erica Whyte about the market reaction, what we know so far, and what might lie ahead. Listen here.

Energy

Companies across the UK's oil and gas supply chain have written to the government expressing "grave concern" about government plans to hike windfall taxes and eliminate investment incentives to an industry that supports 200,000 jobs. In an open letter to HM Treasury, 42 companies have warned that official plans threaten £200bn of investment in all forms of domestic energy, including renewables. The government currently plans to increase windfall taxes on oil and gas profits from 75% to 78%, extend the tax until 2030 and abolish tax incentives for further investment. In the letter, issued by Offshore Energies UK, companies express concern that reduced investment and greater uncertainty would be felt throughout the supply chain "through jobs, and the communities this industry supports, both directly and indirectly." Indeed, Serica Energy, one of the largest gas producers in the North Sea, is reportedly threatening to end investment in the UK because the tax regime has become too unstable to support offshore energy producers. The company produces 5% of the UK’s gas supply and around 600,000 barrels of oil a day and is planning to shift future investment to Norway.

Economics

The UK government borrowed more than expected in July, as spending on public services increased faster than tax receipts. Government borrowing – the difference between spending and income – hit £3.1bn last month, according to the Office for National Statistics (ONS). This was £100m ahead of the prediction by the Office for Budget Responsibility (OBR) back in March and the £2.5bn expected by economists. It was also the highest July figure since July 2021.

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Britain’s private sector companies reported their strongest growth in four months alongside cooling price pressures, suggesting the economy remained in a sweet spot for both the Bank of England and the new government. S&P Global’s composite Purchasing Managers’ Index rose to 53.4 in August, up from 52.8 the previous month. That was slightly higher than the 53 expected by economists, with any reading above 50 indicating an expansion.

The minutes of the Federal Reserve’s July meeting indicated that a September rate cut was likely. “The vast majority” of participants at the July 30-31 meeting “observed that, if the data continued to come in as expected, it would likely be appropriate to ease policy at the next meeting,” the summary said. Markets are fully pricing in a September cut, which would be the first since the emergency easing in the early days of the Covid-19 crisis. The meeting is scheduled for 17-18 September.

The US Bureau for Labor Statistics acknowledged that its non-farm payrolls estimates were significantly above the levels shown by tax records by 818,000. So rather than adding 2.9m jobs in the 12 months to March 2024, there were only 2.1m new jobs. This means a 25-basis-point cut in interest rates is now likely. Should the jobs situation deteriorate – and layoffs rise – a deeper cut may be in prospect at the next meeting.

What could be next for US and UK government bonds?

Eurozone wage growth slowed sharply in the second quarter, strengthening the case for the European Central Bank to cut interest rates in September. Negotiated pay rises rose 3.6% in the quarter, down from 4.7% in the prior thr4ee-month period.

Geopolitics

Kamala Harris has accepted the Democratic nomination for president on the final night of the party convention in Chicago. Ms Harris pledged to lead "for all Americans" and create an "opportunity economy" in a highly personal headline speech. Other key themes include protecting the right to abortion, unity and working-class aspiration. Polls suggest the election remains extremely tight. What would a President Harris do?

China’s state media and foreign ministry criticised Washington, after the New York Times reported that US President Joe Biden reoriented the US′s nuclear strategic plan in March to focus on Beijing’s rapid expansion of its nuclear arsenal. An editorial in the Global Times, a Beijing government mouthpiece, said that China has “become the best excuse” for the US in justifying “maintaining such a massive nuclear arsenal” in the post-Cold War world. “Instead of smearing and hyping up China, the US should reflect on itself and consider how to rebuild mutual trust with China through dialogue and sincerity,” the Global Times editorial added.

The European Union (EU) will lower planned tariffs for Tesla vehicles imported from China to 9% from 20.8%. The tariff on Tesla is far lower than the 21.3% average on companies that cooperated with the EU investigation into electric vehicles (EVs) and 36.3% on those that did not – and are far lower than the 100% tariffs imposed by the US. The levies come on top of the EU’s existing 10% duty on EVs from China. EU officials visited Tesla’s Shanghai operations in June and said that the company had benefited from Chinese state subsidies, below-cost batteries, as well as cheap land and grants for exporters. Under the latest proposals, China’s BYD will have a 17% tariff imposed, with Geely at 19.3% and SAIC at 36.3%. The three rates have been revised downwards since provisional measures were published in June – and may change again. The measures will be in place by the end of October. The EU accounted for 45% of the total value of EVs exported by Beijing between June 2020 and June 2024. In response, China has opened an anti-subsidy investigation into imported dairy products from the EU. Ireland is by far the largest exporter of dairy products to China in the EU.

Western airlines continue to cut flights to China. Low demand due to its moribund economy and tensions with Washington have combined with the high cost of flying around Russian airspace to make the routes highly unprofitable. Earlier this month British Airways said it would suspend flights between London and Beijing from October and Atlantic decided to pull its only China route to Shanghai. Now Australia’s Qantas has cut its Sydney-to-Shanghai route, saying its planes had been flying half-empty.

Companies

GSK announced that the US Food and Drug Administration (FDA) has granted breakthrough therapy designation to its investigational drug, GSK'227, for the treatment of patients with extensive-stage small-cell lung cancer who had experienced disease progression following platinum-based chemotherapy. The designation is intended to accelerate the development and review of treatments that could offer substantial improvements over existing options for serious conditions.

Barratt Development’s merger with peer Redrow completed on Friday, but the companies will continue to operate independently until competition questions settled. On Thursday, the pair announced that, “following the delivery of a copy of the Court Order to the Registrar of Companies”, the scheme had “become effective”, with the entire share capital now owned by Barratt.

BT Group shares slipped following news that Sky will transfer its broadband services to CityFibre’s network from next year. BT currently hosts all of Sky’s approximately 5.7 million broadband customers on its Openreach network. The news undid most of the gains in the shares since the announcement earlier this month that the Indian conglomerate Bharti Enterprises had bought a 24.5% stake in the company.

Retailers continue to struggle. Troubled fashion website Boohoo is in a stand-off with suppliers after withholding payments from suppliers over claims the quality of clothing was too poor. It is understood the online budget specialist has targeted manufacturers it alleges are responsible for producing a high proportion of faulty goods and is refusing to pay them until the problems have been resolved. Also, the remaining 31 Ted Baker stores in the UK and Republic of Ireland closed, putting more than 500 jobs at risk. The company behind Ted Baker's UK shops, No Ordinary Designer Label (NODL), fell into administration in March this year.

John Wood Group shares fell after it posted an operating loss in the first half of the year as revenue fell, but the engineering group’s management maintained its guidance outlook for this year and next.

Sportswear retailer JD Sports Fashion saw a return to growth at stores open for more than a year in its second quarter, with its store opening programme in North America and Europe providing a boost as the UK market remains subdued. Like-for-like sales were 2.4% higher in the three months to 3 August, following a 0.7% year-on-year decline in the first quarter, as comparatives with last year eased.

Synopsys, the electronic design automation software company, has reported solid third-quarter results, with all key financial metrics meeting or exceeding management's guidance. The company's leadership continues to paint a picture of strong demand for their chip design tools. Management maintained its previous revenue growth outlook for the year, but now anticipates improved operating margins and consequently, higher earnings.

Veteran media executive Edgar Bronfman Jr – who once led Warner Music and spirits group Seagram – has submitted a $6bn takeover offer for Paramount Global. The entertainment conglomerate – which owns Hollywood studio Paramount Pictures and TV networks including CBS, Nickelodeon, MTV and the UK’s Channel 5 – has already accepted a merger offer from independent film studio Skydance Media. However, this included a “go-shop period” that allowed Paramount to assess other offers. Mr Bronfman has submitted a $4.3bn offer on behalf of National Amusements, the vehicle that holds media tycoon Shari Redstone’s controlling stake in Paramount, the Wall Street Journal reported.

Shares in JD.com fell sharply in Hong Kong after American retail titan Walmart signalled its intention to dispose of its stake in the Chinese ecommerce giant, worth $3.7bn. Walmart is currently the largest single shareholder in JD.com with a 10.4% take, after exchanging its Chinese ecommerce arm Yihaodian for shares in 2016.

Hong Kong-based insurer AIA reported strong first-half profit growth and a jump in new business value driven by Chinese demand. AIA’s value of new business (VONB), an important measure of sales and future growth, surged 25% to $2.46bn. Net profit for the first six months of this year was $3.31bn, the company said, up 47% from $2.25bn in the same period last year.