Key points
- The Fed's independence is under pressure from the White House, with President Trump potentially altering its governing board.
- Nvidia's growth remains strong, despite concerns over AI-related valuations.
- Gold prices have risen due to market uncertainty, benefiting both the metal and mining shares.
- In Europe, Germany faces economic challenges with disappointing GDP results, while the UK deals with concerns about government debt sustainability and inflation.
Fed in focus
The US Federal Reserve (Fed)’s independence has never been less certain. Not since it was set free from government control in 1951 has it been under such pressure to bend its will to the White House’s desire for lower rates and a weaker US dollar.
This week, the assault on Fed independence ratcheted up a notch after President Trump said he was sacking one of the seven members of the central bank’s governing board. That matters because replacing Lisa Cook would potentially give the President a majority of supportive members and would make it more likely that the Fed would adjust policy in line with his wishes.
He wants cheaper borrowing costs, even if that comes at the cost of higher inflation. Jerome Powell, the Fed chair has resisted those calls all year, leaving rates on hold since last December.
Last week, however, Powell seemed to move towards appeasing the President. He used his speech at the Jackson Hole summit to highlight the rising threat to growth of persistently restrictive policy. The time might be close for a resumption of rate cuts, he said. Shares and bonds rose sharply on Friday in response.
The next decision is on September 17. Much will depend on jobs and inflation data between now and then. The first data to watch will be Friday’s personal consumption expenditures index - the Fed’s preferred measure of inflation.
Nvidia wraps up earnings season
Just as the banks kick off the quarterly results round, Nvidia, the world’s biggest company, now brings it to a close. Tomorrow’s earnings call from the artificial intelligence (AI)-focused chip maker will be closely scrutinised for signs that the artificial intelligence boom might be running out of steam.
Technology stocks, fuelled by investor enthusiasm for AI, have pushed the S&P 500 9% higher so far this year, building on the strong returns in 2023 and 2024. But recently concerns about the high valuations attached to anything AI-related have seemed to puncture the bubble.
Nvidia’s results are expected to be strong again. Growth of 53% is pencilled in. That’s less than the previous quarter’s 69% but still impressive for such a large company (worth more than US$4trn now) and well ahead of the rest of the market’s growth prospects.
Gold miners shine
One beneficiary of tariff and other market uncertainty has been the gold price. That’s good news for investors in the precious metal itself, but it’s also been a tailwind for investors in the miners that dig the metal out of the ground. Shares in the past three months have continued to rise strongly, even as the gold price has levelled out.
That makes sense because as long as costs can be kept under control, a higher gold price should deliver a disproportionate improvement in profits. For years, costs spiralled even as the gold price rose but more recently lower energy costs and more discipline from the companies themselves have kept things in better balance. The outlook remains positive for the sector, with the usual caveat that investors often come late to the cyclical and volatile gold market.
European worries
Two of Europe’s biggest economies are in focus this week. In Germany, attention shifts from last week’s disappointing gross domestic product (GDP) revision to this week’s Ifo Business Survey. No-one is expecting much in the way of good news and the German economy, which has shrunk in six of the last ten quarters remains in a rut. Autos are notably under pressure, as tariffs add to increased competition in electric vehicles from China.
Meanwhile in the UK, the rise in bond yields continues as investors fret about the sustainability of Britain’s government debts and persistent inflation, running at nearly twice the Bank of England’s target. The 30-year gilt yield is over 5.5% and the inflation-linked bond is yielding more than at any time since 1998, higher even than after the infamous 2022 mini budget. Rising debt servicing costs are just one more factor squeezing the Chancellor’s ‘fiscal headroom’ and adding to the black hole that she will have to try and fill at this autumn’s widely feared Budget.
