Morning Bid: Record highs abound, except in usual place

A look at the day ahead in U.S. and global markets from Mike Dolan

Record stock market highs have lit up across the world once again – though not yet for the usual suspects in the S&P500 and Nasdaq.

Despite a rare stumble for the artificial intelligence theme after Nvidia (NASDAQ:NVDA)’s results underwhelmed this week, the rest of the stock market complex shrugged it off and has instead lapped up a tasty diet of brisk economic growth along with falling inflation and interest rates.

So much so that if you adjust the S&P500 for the outsize contribution of Big Tech megacaps, it now shows the equal-weighted index hitting record highs with year-to-date gains of more than 10%.

Underlining the point, the Dow Jones Industrial Average hit another record close on Thursday and both Germany’s DAX and Europe’s broad STOXX 600 hit new highs on Friday too.

And that broadening of what many had feared was an overly concentrated market is another sign of some normalisation of market behaviour, along with a return of volatility gauges back closer to long-term averages and a resumption of the negative correlation between stock and bond returns.

For many, that’s a much more sustainable constellation and the economic picture backs that up going into Monday’s Labor Day holiday.

Second-quarter U.S. GDP growth was revised higher on Thursday, while embedded PCE inflation gauges were marked lower and weekly jobless readings were little changed.

The release on Friday of the July monthly PCE reading is next up and is expected to be similarly benign, allowing the Federal Reserve to go ahead with its first quarter-point interest rate cut next month – while market pricing retains a total of 100 basis points of easing to year-end.

Wall St stock futures were higher again ahead of the final trading day of the month and Treasury yields fell back a touch from Thursday’s slight gains.

Soothing the bond market in a week of heavy new debt sales was an affirmation late Thursday of Fitch’s AA+ U.S. sovereign credit rating with a stable outlook.

Borrowing costs across the economy are ebbing more generally, with the average rate on popular U.S. 30-year mortgages falling to 6.35% this week, the lowest since May 2023.

Pointedly, Fitch’s review said the U.S. fiscal profile is likely to remain largely unchanged regardless of who wins the upcoming presidential election, citing structural strengths including high per capita income and financial flexibility as bolstering the credit rating.

And despite a flurry of election trades earlier in the summer, the dramatic switch of fortunes in opinion polls and betting markets has barely flickered on the overall setting of buoyant U.S. markets at large.

Democratic Vice President Kamala Harris’ late entry in the presidential race after President Joe Biden’s withdrawal in July tightened the race against Republican candidate Donald Trump. A Reuters/Ipsos poll this week showed she leads 45% to 41% and another published in Friday’s Wall Street Journal confirmed she was marginally ahead – with betting markets now seeing her as clear favorite.

Harris’ first interview with a major news organization since becoming the Democratic nominee was aired on CNN on Thursday, but there was little to disturb market views of what her Presidency would look like.

In Europe, the inflation and interest rate picture was arguably even better.

Euro zone inflation fell to its lowest level in three years at 2.2% this month, just shy of the European Central Bank’s 2.0% target and boosting the case for a second ECB interest rate cut of the year in September – even before the Fed gets going.

A day earlier, Germany’s EU-harmonized headline inflation rate actually hit the 2.0% target for the first time in almost 3-1/2 years.

Money markets currently see a 60% chance the ECB will cut rates a third time by October – slightly lower than on Thursday. Euro/dollar steadied as a result following this week’s sharp recoil from one-year highs.

The inflation picture in Japan is slightly different.

Core inflation in Japan’s capital accelerated for a fourth straight month in August, tracking comfortably above the central bank’s 2% target and backing market expectations of more interest rate hikes ahead.

Dollar/yen held steady just above 145.

But China’s yuan was a much bigger mover – hitting its best levels in more than a year and authorities battle to shore up recently sliding government bond yields and August business surveys are due for release on Saturday.

Increased dollar selling by Chinese corporates – triggered by shifting dollar expectations – could morph into a “stampede” in the short term, boosting the yuan further, China International Capital Corp said in a note.

In corporate news, AI refused to be left out of the limelight. Apple (NASDAQ:AAPL) and Nvidia are reportedly in talks to invest in OpenAI as part of a new fundraising round that could value the ChatGPT maker above $100 billion, according to media reports on Thursday.

Key developments that should provide more direction to U.S. markets later on Friday:

* US July PCE inflation gauge, personal income and consumption, Chicago August business survey, final Aug reading for University of Michigan sentiment; Canada Q2 GDP revision