Market in Numbers

The standout moves were in America. The Nasdaq gained 5.2%, while the S&P 500 reached another record high. At the same time, the US 10-year Treasury yield fell by around 9 basis points over the week and gold enjoyed its strongest week since January.

The Big Picture

Bad economic news became good news for markets

There were three ingredients behind last week’s rally: strong corporate profits, weaker US employment and falling oil prices.

The most important arrived on Friday. The US economy unexpectedly lost 23,000 jobs in July, rather than adding around 80,000 as economists expected. Even more significantly, May and June payroll figures were revised down by a combined 103,000 jobs. (Bureau of Labor Statistics)

Normally, weaker employment isn’t something investors celebrate. But markets interpreted the figures as reducing the chance that the Federal Reserve will need to raise interest rates again soon. Treasury yields fell, the dollar weakened and shares rose. Markets now put the probability of a September Fed rate rise at roughly 44%, down sharply after the jobs report.

That leaves investors with an interesting question this week: is the US economy simply cooling sufficiently to tame inflation, or is it weakening too quickly?

Three Things That Mattered Last Week

1. The US jobs machine suddenly looked much weaker

What happened?

US non-farm payroll employment fell by 23,000 in July, while unemployment remained relatively low at 4.1%. The labour-force participation rate also slipped to 61.4%, while substantial downward revisions showed employment growth in May and June had previously been overstated. (Bureau of Labor Statistics)

Why markets reacted

A softer labour market should eventually reduce wage pressure and therefore inflation.

That changes the calculation for the Federal Reserve. Before Friday, investors were increasingly worried that persistent inflation might require another interest-rate increase. The employment report reduced that risk, sending bond yields lower and helping growth shares in particular.

Why this matters

Investors need to distinguish between slower growth and recession.

Some cooling would arguably be helpful: it could allow inflation to fall without forcing the Fed to tighten policy further. But if employment deterioration accelerates, attention will quickly switch from interest rates to corporate profits.

This week’s inflation figures therefore assume even greater importance.

2. Oil prices fell—but the Middle East remains the wild card

What happened?

Brent crude finished Friday at $83.55 a barrel, around 5% lower over the week, after hopes grew that negotiations involving Iran, Oman and the United States might eventually improve shipping through the Strait of Hormuz.

However, a full resolution remains elusive. Iran has continued to attach conditions to reopening the Strait, through which roughly a fifth of global oil and LNG supplies normally passed before the conflict.

Why markets reacted

Oil has become one of the most important variables for monetary policy.

Lower oil means less pressure on petrol prices, transport costs and inflation. That helps government bonds and reduces the pressure on central banks to raise interest rates.

Why this matters

For UK investors, oil matters particularly because Britain imports much of its energy.

The UK 10-year gilt yield fell to around 4.91% last week as lower energy prices helped ease inflation concerns.

A durable Middle East settlement would therefore be positive well beyond the energy market. Renewed escalation could quickly reverse that move.

3. Earnings remain strong—but AI investors are becoming choosier

What happened?

The corporate reporting season continued to support equities. Among MSCI World companies that had reported by Friday, profits were running around 41% above a year earlier, with roughly three-quarters beating expectations.

But individual share-price reactions told a more interesting story.

AMD fell around 7% after results that were objectively strong but failed to clear increasingly demanding expectations. Its data-centre revenues more than doubled, yet investors wanted stronger evidence that enormous AI expenditure would translate into even faster growth.

SpaceX similarly fell sharply as investors questioned the scale of its AI capital spending.

Why this matters

The AI story isn’t disappearing. It is maturing.

Markets are increasingly distinguishing between businesses that talk about AI, those spending heavily on it and those already generating attractive financial returns from it.

That is an important change for investors paying historically high valuations for some technology companies.

What Investors Should Watch This Week

1. Wednesday: US inflation

This is comfortably the week’s biggest scheduled event.

July US consumer-price inflation is expected to be around 3.4%, while core inflation—which removes volatile food and energy prices—is expected near 2.5%. The figures arrive at 1.30pm UK time on Wednesday. (Bureau of Labor Statistics)

What could surprise investors?

A lower reading combined with Friday’s weak employment figures would strengthen the case for leaving rates unchanged and could push Treasury yields lower.

A surprisingly high number would be much more uncomfortable: investors would face the combination of weakening employment and persistent inflation.

That could hurt both bonds and expensive growth shares.

2. Thursday: How strong is the UK economy?

The ONS publishes June GDP and second-quarter economic growth at 7am on Thursday. (Office for National Statistics)

Markets expect the economy to have shown reasonable resilience despite elevated energy prices, with economists surveyed expecting quarterly growth of around 0.4%.

A stronger figure could reinforce expectations that the Bank of England has little urgency to reduce rates. A weaker number would increase concerns that the energy shock and high borrowing costs are beginning to bite.

For UK investors, watch gilt yields and sterling as closely as the headline GDP number.

3. Thursday and Friday: The US inflation story gets a second test

Thursday brings producer-price inflation, followed on Friday by US retail sales. (Bureau of Labor Statistics)

Together, they help answer two different questions.

Producer prices tell us whether inflationary pressures are building inside companies’ supply chains. Retail sales tell us whether American households are still spending.

The ideal combination for markets would probably be cooling prices and resilient consumption.

Strong inflation accompanied by strong spending could revive rate-rise expectations. Very weak retail sales, meanwhile, could turn concerns about a cooling economy into fears about recession.

4. Another test of the AI investment boom

The major technology earnings season is winding down, but Cisco, Applied Materials and AI infrastructure companies including CoreWeave are among those investors will scrutinise.

Cisco should provide evidence about demand for the networking equipment that connects AI data centres. Applied Materials offers another window into semiconductor manufacturing investment.

The key question is becoming familiar: are the extraordinary sums being spent on AI continuing to generate sufficient demand and profits?

Investment Insight

When “bad news” is good news for shares

Friday provided a classic example of something that can initially seem strange to new investors: the economy produced disappointing news and the stock market went up.

Markets don’t simply respond to whether economic news is good or bad. They respond to whether it changes expectations about the future.

The weak employment report reduced expectations for higher US interest rates. That pushed Treasury yields down.

Why does that help shares?

Think of a company’s share price as the value today of profits it may earn over many years. When interest rates and bond yields fall, those future profits become more valuable in today’s money. This effect is particularly powerful for fast-growing technology businesses whose investors expect much of their profit to arrive well into the future.

But there is a limit.

A little economic weakness can be market-friendly if it lowers inflation and interest rates. Too much weakness eventually damages company revenues and profits.

That is why investors should resist simplistic conclusions such as “lower rates are always good for shares”.

The ideal backdrop is not a weak economy. It is sustainable economic growth accompanied by controlled inflation and growing corporate profits.

For long-term investors, this is another reason diversified portfolios matter. Different assets respond differently as the balance between growth, inflation and interest rates changes.

Five Things I’ll Be Watching

• US CPI – Wednesday’s inflation number could determine whether September’s Fed meeting remains live for another rate increase.
• The US 10-year yield – A move back towards 5% would again challenge expensive equity valuations.
• The Strait of Hormuz – Genuine progress towards reopening shipping could take further pressure off oil and inflation.
• UK GDP – Thursday provides the clearest indication yet of how Britain is coping with higher energy costs.
• AI earnings guidance – Investors increasingly want evidence of returns on investment rather than ever-larger spending commitments.

Final Thought

Last week neatly demonstrated why reacting emotionally to individual headlines rarely makes a good investment strategy.

Weak employment helped shares. Falling oil helped bonds. Strong company results supported markets, yet some companies producing excellent numbers still saw their shares fall because expectations had become too high.

Markets will continue to move every week. Successful long-term investing depends less on predicting each move than on maintaining a diversified portfolio, sensible expectations and the patience to allow compounding to work.

Understanding the headlines is useful. Constantly reacting to them usually isn’t.