Tesla steals the limelight, as Fed rate fears and oil price weight on sentiment

As we start a new week, the market is digesting the fallout from Kevin Warsh’s Jackson Hole speech. Traders are also faced with a resumption of air strikes between the US and rising oil prices, and renewed expectations of a Federal Reserve rate hike as early as September.

The key takeaways from Warsh’s speech 

The key takeaways from Warsh’s speech last Friday include: his laser focus on inflation, which he considers to be too high, his complete rejection of forward guidance in any form, his assessment that US economic growth is solid and his high level of optimism for AI and its potential productivity gains, and his assessment that financial conditions are not overly restrictive. The last point is worth noting. Warsh clearly sees inflation as being too high, and economic growth in his view is solid. Due to this, the Fed has room to hold rates higher for longer or even raise rates as early as the September meeting. 

Rising oil prices and rate hike expectations make September a tricky month for stocks 

Rising oil prices, Brent crude is back above $90 per barrel on Monday as traders price in renewed hostilities between the US and Iran, combined with a 66% surge in expectations for a September rate hike, is taking the edge off risk sentiment as we end August. It also means that there is a tricky backdrop for stocks as we start a new month. US stocks are mildly lower on Monday, although there are large gains for Nvidia, Tesla and SpaceX. 

Tesla shines 

Tesla is up over 4% today, and is the second best performer on the S&P 500, the share price is at a 1-week high, and is above its 50-day sma. The pop in the share price is down to positive news about Optimus production, Musk’s humanoid robot, and because of a recent executive order by the President that bans imports of foreign manufactured power equipment, which should benefit domestic suppliers. This is good news for Tesla’s Energy Generation and Storage segment. 

Chart 1: Tesla, reaching the 50-day sma

Source: XTB 

August favours Asia and US over European stocks 

Overall, apart from pockets of activity, it is generally a quiet end to the month. However, August has been good to stock market bulls, with strong gains for Asian stocks and US indices. European stocks did not fare as well. The FTSE 100 fell 0.4% this month, while the Eurostoxx 600 index is basically flat. 

Seasonality could also weigh on market sentiment 

The focus will be on the new month ahead, and what September could hold. September is seasonally the weakest month for the S&P 500, and it is the only calendar month that has a negative average return across long-term historical data. 

AI momentum remains strong ahead of key earnings 

Momentum in markets, especially tech and AI linked stocks, was strong into the end of August, driven by exquisite results for Nvidia and a strong rebound for software names, as they continue their recovery after a rough start to the year.

Although it’s been a quiet start to the week, there is plenty of event risk ahead. This includes the latest Non Farm payrolls report for the US and Broadcom’s results. These events will test market sentiment as global indices approach record highs. 

Although the index is lower on Monday, the S&P 500 is less than 1% from the high reached in mid-August. Propping up the index has been an incredibly strong Q2 earnings season for the US; the S&P 500 is reporting its strongest quarterly earnings growth rate since Q4 2021. 

Payrolls risk ahead of key FOMC meeting 

However, earnings could be old news as we move through this week, and there are several events that could impact market sentiment. 

Firstly, the US labour market report that is scheduled for release this Friday. The market is expecting 45,000 jobs to have been created, and the unemployment rate is expected to rise a notch to 4.2% from 4.1%. 

July’s weaker than expected payrolls reading weighed on the dollar and triggered concern about the strength of the US economy, which led to a reduction in interest rate expectations.  US Treasury yields also fell earlier in the month, although they reversed course on Friday after Warsh’s hawkish speech.

For this trend to continue, we will need to see a continuation of this theme, ie, another weak reading for payrolls, or a bounce back, which could open the door to further hikes, especially after Fed chair Kevin Warsh continued to sound concerned about the inflation outlook in his Jackson Hole speech. 

This payrolls report comes at an auspicious time. Inflation data was hotter than expected in July, and, combined with a bounce back in US payrolls growth, this could trigger significant market volatility as the prospect of a near term rate hike comes back into focus. As we lead up to the September 16th Federal Reserve meeting, there is currently a 66% chance of a hike. However, now that the Fed is not giving explicit forward guidance under new chair Kevin Warsh, investors are scrutinizing economic data even more, and each Fed meeting is potentially a ‘live’ meeting. So we expect the volatility after this Friday’s payrolls reading to be even higher than normal.  

Elsewhere, it is worth watching the Eurozone’s CPI reading for August. This is the last inflation report before the ECB meeting on 10th September, where markets are pricing in a 75% chance of a rate hike, with a further hike expected by December. Due to this, the CPI data could meaningfully impact the euro and Eurozone bond yields and the euro. EUR/USD rose 0.7% this month, and is the second best performer in the G7 FX space. Higher than expected CPI could bring $1.20 back into focus.  

Chart 2: EUR/USD 

Source: XTB 

In the UK, flash PMI readings will be worth watching to get a sense of how the economy is performing as we move through Q3. Elsewhere, the central bank of New Zealand is expected to raise rates, the Reserve Bank of Canada is expected to keep rates on hold. 

Earnings focus: can Broadcom keep the AI trade turning? 

This Wednesday we get another earnings test for the AI trade. Broadcom will report results and the market wants to know if Broadcom will offer the same positive outlook for revenues as Nvidia did, after the latter forecast revenue growth of $108bn for the current quarter. 

High hopes for Broadcom 

Broadcom provides custom chips for Google, its longest standing partner, Meta, OpenAI, Anthropic and Apple. Along with Marvell, Broadcom has a 70% market share of the custom accelerator chip market, which is central to agentic AI. Considering its main customers are still boosting capex spending to reach their AI ambitions, expectations are high that Broadcom could beat revenue and earnings guidance. 

Analysts are expecting revenue to come in at $29.3bn for last quarter, and for earnings per share to come in at $3.22, which would make Broadcom more profitable on a per-share basis than Nvidia. Any hint of disappointment in this earnings report would be a major downside surprise, and could weigh on the AI trade and market sentiment especially towards the US and Asian indices in South Korea and Japan.