The Week Ahead

The week ahead: US payrolls, UK banks ‘bounce’ back and tariff news to dominate

European stocks opened higher at the start of September, as Friday’s sell off eases. US markets are closed today for the Labor market holiday so it may be a quiet start to the month. The focus turns to next week’s confidence vote in the French government, along with central bank meetings. The Non-Farm Payrolls report will be the main event at the end of this week.

There was bad news for the UK at the start of this week. Nationwide reported that house prices fell in August. Prices inched  down by 0.1%, bringing the annual growth rate to 2.1%, down from 2.4% in July. This could be the start of a weak Autumn for the UK property sector, as the potential for property taxes in the October Budget are mulled over by government. However, today’s price data suggests that we could be past the peak for UK house prices, as valuations have become exceptionally stretched in the post Covid years. The real estate sector is the second weakest performer on the FTSE 100 at the start of this week.

France is also in focus, after the Prime Minister said there is a chance that he could lose next week’s confidence vote, which may cause him to resign. This would suggest political turmoil in France, which could affect its credit rating, Fitch will release its latest review on French sovereign debt on 12^th September. French and European bond yields are rising today, after a torrid August, where 10-year yields rose 22bps in the UK and 18bps in France, there were smaller gains in Germany and southern Europe. and it could be a tough Autumn for the most highly indebted nations in Europe.

Wil the ‘September effect’ strike again?

The start of a new month is always a crucial time for investors. September is historically a weak month for stocks with the ‘September effect’ causing a chill to run through financial markets. Stocks tend to underperform this month on both sides of the Atlantic, so will the same happen this year?

August was a strong month for global stocks, and they were a sea of green. The S&P 500 rose by 3.56%, the Eurostoxx rose by 3.6%, while the FTSE 100 was weighed down by losses for its banking sector but it still managed to eke out a 1.6% gain. However, the mood shifted at the end of last week. An underwhelming set of results for Nvidia, along with a sharp selloff in stock markets in Europe and the US saw losses for most European and US indices last week. Interestingly, the mid-cap Russell 2000 index outperformed the S&P 500 last week, suggesting that demand for stocks has not gone away, but it could be shifting away from US tech giants and towards other sectors of the US market.

China vs. the US: the new chip war

Asian stocks also had a strong week. The Main Chinese index, the CSI 300, rose by 2.71% last week, and is currently outperforming the Nasdaq and the S&P 500 YTD, and is higher by more than 14%. A key theme at the end of the third quarter will be whether the Chinese semini conductor makers will outperform the likes of Nvidia and AMD. The China question is looming large for US chip makers as US tariffs and a push from the Chinese government for domestic chip production weigh on their stock prices. For example, Nvidia’s share price fell more than 3% on Friday, and is lower by more than 1% in the past month, while Cambricon, a Chinese manufacturer of chips used for AI, is higher by 113% in the past month and is the best performing stock on the CSI 300 in the past 4 weeks, although it has lost some momentum in recent days. Investors could switch to Chinese chip makers if they think that Nvidia won’t be able to capitalize on Chinese demand, and this is a developing theme worth watching.

UK banking stocks stage a tentative recovery as Budget woes remain

Another developing theme to watch is the breakdown of UK assets. Cracks are starting to appear in the FTSE 100, which was the worst performing index in Europe last month. The drip feed of potential tax rises that could be included in the Autumn Budget hit the financial sector hard on Friday, when a potential windfall tax on UK banks was touted as a way to plug the £30bn black hole in the UK’s finances. Retail banks sold off sharply, including NatWest and Lloyds, which were some of the worst performing stocks on the FTSE 100 at the end of last week.

However, banks may have sold off too sharply, since there is now some doubts starting to creep in about whether the Chancellor will actually put in place another banking tax to recoup some of the profits that banks made during the period of the Bank of England’s Quantitative Easing programme, and specifically on interest made on reserves they held at the BOE. In July, the Chancellor unveiled her  Financial Services Growth and Competitiveness strategy. It would be strange to impose a tax that would weaken banks’ competitiveness a few months after the release of this new strategy document. UK banks are indeed staging a tentative recovery on Monday, and NatWest and Barclays are both higher by more than 1%, reversing some of Friday’s sell off. This could lead to the FTSE 100 outperforming its European peers at the start of a new week.

Why US tariffs won’t be scrapped, at least not for now

Other themes that will likely dominate financial markets this month include central banks, especially a Federal Reserve rate cut and US trade policy, after a federal appeals court ruled that President Trump’s tariffs were illegal since they were issued under an emergency law. For now, the tariffs remain in place while the case continues, and in the near future only tariffs on China, Canada and Mexico and those who sued the White House may see their tariffs reduced. However, this is a setback for Donald Trump and could lead to serious diplomatic embarrassment for the President and his White House team. How the market reacts to this on Monday and Tuesday when the US stocks markets reopen, will be worth watching. Could this news ignite the next stage of the global rally and defy fears that September is seasonally a bad month for stocks? Will US stocks outperform since tariff news has been toxic to US stocks in the past? Or will the market look through this news altogether as the case is ongoing?

Ahead this week, here are the main economic events that are worth watching closely:

1, US Non-Farm Payrolls

The US labour market report is always the highlight of the economic calendar at the start of the month. The August report will be even more important than usual since it is the last report before the September Federal Reserve meeting, where the market has priced in an 87% chance of a rate cut. There are two full rate cuts priced in for the US in September and December, with a 53% chance of another cut in October.

The market reaction to the August NFP report is likely to be binary: a weak report will solidify expectations of a cut from the Fed even more, while a stronger than expected report could trigger a recalibration of the market’s expectations for interest rates. The market currently expects a 75k increase in payrolls for last month, which is up from the 73k recorded in July. The July report caused the President so much distress that he immediately fired the head of the Bureau of Labor Statistics who produce the figure. Thus, it is also worth watching Trump’s reaction if the number is as bad as feared. However, the President needs to be careful what he wishes for, as a strong payrolls report could see a slower pace of rate cuts down the line.

The manufacturing sector is expected to record a decline in payrolls for a fourth consecutive month, and the unemployment rate is expected to edge up to 4.3% from 4.2% in July. Average hourly earnings are expected to decline slightly to 3.7% from 3.9% in July.

Hiring was weak in July, and Fed members including Christopher Waller have come out to say that they believe momentum is to the downside for the US labour market. However, other signs suggest that hiring may have picked up in August and we cannot rule out an upside surprise in this week’s report. If JOLTS data shows an increase in job vacancies, then we could see the dollar strengthen and US yields start to pick up.

Since the last payrolls report, the 10-year US Treasury yield is lower by 14bps, and the 2-year yield is lower by 32bps. The lack of yield support has weighed on the dollar, which is the second worst performing currency in the G10 FX space in August.

2, European inflation

The ECB will go into their quiet period this week, ahead of their Sept 11^th meeting, where the market is expecting virtually no chance of a rate cut. The focus instead will be on the August CPI reading for the currency bloc. Inflation is expected to rise a touch last month, with the headline rate rising 0.1% on the month, and the annual rate remaining at 2%, the ECB’s target rate. Core inflation is expected to drop to 2.2% from 2.3% in July. Inflation was weaker than expected in Spain and France, where annual inflation is a mere 0.8%. Inflation in Germany ticked up to 2.1%, but this may still be an acceptable rate for the ECB.

Several ECB members have hinted that the Bank is at the end of their rate hiking cycle, which is why we could see the euro maintain strength vs. the USD and pound, even if inflation is a touch weaker than expected. EUR/USD is testing the $1.17 level, and with strong support at $1.1650, the 50-day sma, the next resistance level of note is the $1.1830 high of the year so far from the start of July. A weaker than expected payrolls report could see the single currency test this high later this week.