Written by Ilaria Massei
Sometimes in markets, weaker news is welcome news. Last week’s US jobs report was the clearest example: the economy added just 57,000 jobs in June, around half of what economists expected, and previous months were revised lower too. The unemployment rate fell to 4.2% largely because the rate only counts people looking for work, and fewer people were doing so. This can be translated into a gently cooling jobs market, rather than a collapsing one.
For investors, the significance lies in interest rates. With the Federal Reserve under new Chair Kevin Warsh weighing whether to raise rates to combat elevated inflation, a softer jobs picture bought some breathing room. Markets slashed the odds of a rise at July’s meeting, though a move in September remains possible, and with wages growing at a steady 3.5%, there is little sign of a wage-price spiral (where pay and prices chase each other upwards). The S&P 500 index (a measure of 500 of America’s largest companies) returned +0.4% over the week, while the technology-focused Nasdaq-100 returned -0.5%, lowered by the US Dollar weakness.
The rotation between technology’s perceived AI winners and losers continued, with investors debating who captures AI’s value rather than selling the story wholesale. The shift came after reports that Meta plans to sell its spare computing power, at a time when the price of using AI services keeps falling. That favours the giants who own the data centres – Microsoft, Amazon, Alphabet (Google’s parent company) and Meta itself – which can earn money renting out capacity to whichever AI model wins. It is worse for chip and memory makers, which may sell fewer new chips than markets had assumed. Micron fell sharply in the US, as did Samsung and SK Hynix in Asia – two companies so large, around half the value of the entire South Korean market, that their falls briefly halted trading in Seoul on Thursday. With earnings season ahead and growth of over 20% expected largely from AI-related firms such as Nvidia and Micron, the coming weeks will test that optimism.
At home, attention turned to the public purse. UK government bonds, known as gilts (loans to the government paying a fixed rate of interest), underperformed as investors weighed the spending plans of incoming Andy Burnham, including a reported shortfall in the defence budget. Markets have so far given him the benefit of the doubt but will watch his commitment to the fiscal rules closely.
Elsewhere, the Japanese yen fell to a 40-year low, keeping pressure on Japan’s authorities to step in, while oil drifted lower as Middle East supply recovered. Natural gas, however, remains elevated on continued supply disruption – a reminder that the inflation story is not completely over.
No one can reliably predict the direction of all these forces. That is precisely why we hold diversified portfolios: so that whichever way the currents flow, part of the portfolio is positioned to benefit. For long term investors, that remains the surest course.
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