Finimize - 💫 The Fed’s new focus

🔍 The focus this week: The US jobs market

The Federal Reserve (Fed) has a “dual mandate”, and that keeps it spinning two different plates all the time. One plate represents price stability – that is, long-term inflation around 2% – and the other represents maximum employment. The Fed’s task is to adjust interest rates and other tools in a way that keeps the two plates rotating smoothly, without either one crashing to the floor. Lately, the inflation plate has been whirling around just fine, but the jobs plate has started to wobble. So, it’s no surprise that the central bank says it’s now devoting much of its focus to that one.

That makes the coming week a big one for the Fed: on Friday, the US Labor Department will release its key monthly employment report for August. It will be the final up-close view into the health of the country’s job market before the Fed convenes for an interest rate decision on September 19th.

Economists are forecasting that the US economy added 165,000 new jobs in August. But if the report’s figures fall well short of that – at or below zero, for example – or if the 4.3% unemployment rate moves much higher, that will sharply increase the likelihood that the Fed will take the knife a bit deeper into interest rates, with a 0.5 percentage point cut, instead of a 0.25, to give the labor market the kind of boost that lower borrowing rates can bring. Mind you, the stock market probably won’t like that: it’s likely to tumble if the labor market report offers further hint that a recession is brewing.

Now, the Fed has three interest rate decisions left on the calendar this year, and traders are already betting it will announce a 0.25 percentage point trim on two of those dates and a 0.5 percentage point cut on the other. If they’re right, the August job report could determine how quickly interest rates come down. And that makes this a big week for investors too.

📅 On the calendar

• Monday: US markets closed for Labor Day.
• Tuesday: US manufacturing PMI (August).
• Wednesday: China PMIs (August), US job openings and labor turnover survey (August), US trade balance (July), Bank of Canada interest rate announcement. Earnings: Hewlett Packard Enterprise.
• Thursday: US ISM Service PMI (August), eurozone retail sales (July). Earnings Docusign.
• Friday: US labor market report (August), UK house prices (August), Japan household spending (July).

👀 What you might’ve missed last week

US

• Nvidia’s earnings beat estimates for the seventh consecutive quarter.
• Berkshire Hathaway became the first non-tech company to join the $1 trillion club.
• Apple and Nvidia entered talks to invest in ChatGPT maker OpenAI.

Europe

• European stocks hit new record highs.

✍️ What does all this mean?

Nvidia’s earnings announcements are closely watched by pretty much everyone, and that’s hardly a surprise: the $3 trillion supernova sits at the center of the AI boom. And the latest quarter handed folks another solid report: the chipmaker beat sales and profit expectations for the seventh consecutive quarter – with both rising more than 120%. Its forecasts for the current period were high-flying too. Still, its share price slumped after the update, suggesting that investor expectations and valuations have reached an unrealistic altitude, requiring magnificent earnings – not just great ones.

Berkshire Hathaway became the first non-tech company to top $1 trillion in market value – a sweet milestone that happened to coincide with chairman and CEO Warren Buffett’s 94th birthday week. Berkshire’s share price is up about 30% this year – handily outmuscling the S&P 500’s 17%. And that’s despite the fact that the firm is holding about $276.9 billion in cash – invested mostly in short-term US Treasuries that return only about 5% a year. Investors have high hopes for the conglomerate, after all: they’re optimistic that an improving economy will benefit its diverse holdings and they see higher prices on home insurance – one of its major operating businesses – as having a positive impact on its bottom line.

Nvidia, Apple, and Microsoft were all said to be in talks to raise fresh funds that would value ChatGPT-maker at more than $100 billion, up from roughly $86 billion now. The new funding round – led by venture capital firm Thrive – would give OpenAI its biggest cash injection since Microsoft’s headline-grabbing $10 billion investment back in January 2023, and will help the company develop its next AI model, GPT-5.

The Stoxx 600 – Europe’s benchmark stock index – hit a record high last week, boosted by some better news and a better mood across the continent. Eurozone inflation had dipped back to a three-year low, economic confidence gauges had ticked higher, and there was even a thawing of some nagging trade tensions, as China dropped its plan to impose tariffs on French cognac. Now, the European Central Bank is expected to raise a glass to that, lowering its key interest rate for a second time at its September 12th meeting.