Stocks Rally but Focus Shifts to Rates

August ended with a broadly positive outcome for equity markets, but also with an important shift in the macroeconomic backdrop. The resilience of activity and corporate earnings continued to support risk assets, while enthusiasm around the artificial intelligence theme broadened out to segments such as "software". In the United States, the S&P 500 rose by around 2.6%, the Nasdaq by 3.9% and the Dow Jones by 1.3%, while in Europe the STOXX 600 posted a more modest gain of 0.3%, still completing its fifth consecutive month of gains. The main counterweight came from interest rates: the combination of persistent inflation, elevated oil prices and growing concern over public finances once again put pressure on sovereign yields.

In the United States, the data continued to point to a resilient economy. The labour market remained relatively balanced and industrial activity stayed in expansion territory, although the ISM Manufacturing index eased from 55.6 to 54.6 points in August. The employment report reinforced the resilience of the US economy. In August, 162,000 jobs were created, almost triple what had been expected, while the unemployment rate held at 4.1% and the previous two months' figures were revised upward. Wages rose 3.1% year-on-year, pointing to a solid labour market but without an acceleration in wage pressures. At the same time, price pressures remained significant, reflecting the rise in commodity costs caused by the disruption linked to the conflict in the Middle East. Against this backdrop, Kevin Warsh's speech at Jackson Hole was one of the month's most important events. The Federal Reserve Chair reaffirmed the commitment to the 2% inflation target and implicitly acknowledged that rates might need to rise again if convincing evidence of disinflation fails to materialise. PCE inflation stood at 3.7% in July, contributing to a significant rise in the implied probability of a 25 basis point hike in September by the end of the month.

In the eurozone, the picture likewise showed greater economic resilience, but also fresh inflationary risks. The manufacturing PMI rose to 52.7 points in August, its highest level since May 2022, benefiting from a recovery in new orders and exports, with the improvement particularly evident in Germany. Conversely, eurozone inflation accelerated from 2.9% to 3.3%, largely on the back of energy prices, while core inflation eased slightly to 2.4%. This combination suggests that the energy shock has not yet fed through broadly to other prices, but it reinforces the possibility of the European Central Bank raising rates again in September.

The bond market directly reflected this shift in expectations. After Jackson Hole, the two-year Treasury yield rose to 4.34% and the ten-year yield to around 4.72%, while longer maturities remained under pressure from inflation, elevated public deficits and increased debt issuance. In Europe, the move was similar, with the two-year German yield reaching, by the end of the month, its highest level since July 2024. Rather than reflecting a debt crisis, the market appears to be demanding a higher premium for taking on duration risk, in a context where short-term rates remain attractive.

On the geopolitical front, the conflict with Iran remained the main risk factor. Disruption to trade through the Strait of Hormuz continued to weigh on energy supply, and Brent crude ended August once again close to $100 a barrel, following a fresh escalation between the United States and Iran. At the same time, US tariffs continued to put pressure on industrial costs and to add to uncertainty over global trade.

The medium-term outlook remains moderately constructive for equity markets, underpinned by economic growth and corporate earnings. However, the balance has become less comfortable. The possibility of further rate hikes, structurally higher long-term yields and oil prices near $90 are raising the bar for valuations. The central scenario continues to favour exposure to equities, but with greater selectivity and less room for negative surprises in the inflation trajectory.