Making sense of the forces driving global markets

By Jamie McGeever, Reuters Open Interest Markets Columnist 

U.S. and world stocks roared to new highs on Monday, and the dollar and Treasury yields slipped as investors maintained an aggressively 'risk on' stance in anticipation of an interest rate cut from the Federal Reserve later this week. 

More on that below. In my column today I look at the U.S. housing and labor markets, and how the simultaneous decline in both threatens to feed off each other and create a powerful headwind for the economy.

If you have more time to read, here are a few articles I recommend to help you make sense of what happened in markets today.

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* US-SINO TRADE

US-China trade talks took a forward leap on Monday, with a framework agreement reached to switch TikTok to U.S.-controlled ownership and President Donald Trump confirming he will talk to Chinese counterpart Xi Jinping on Friday. 

Tech and AI are very much at the heart of the talks, and there may be a lot of hard bargaining still to be done. Beijing also said on Monday that a preliminary investigation of Nvidia had found the U.S. chip giant had violated its anti-monopoly law.     

* Tech-tonic fizz

Whether it be price, valuation, or concentration, investors know there are reasonable grounds to at least be cautious on the U.S. tech/AI boom. But it shows no sign of slowing, far less reversing, and on Monday it broke new ground. 

Tesla surged on CEO Elon Musk's $1 billion share purchase, Alphabet joined the $3 trillion club, and the communication services sector rose 2.3% - despite Nvidia's lackluster performance on news of China's probe. The sector is now up 27% this year, more than double the S&P 500 index's 12% gain.  

* Fragile China

The Chinese economic 'data dump' for August has been pretty unambiguous - Asia's largest economy is struggling. The latest readings of inflation, industrial production, bank lending, urban investment and retail sales have all missed expectations, while one of the few indicators to surprise in the upside was the unemployment rate.

This will add pressure on Beijing to inject more fiscal stimulus to ensure this year's growth target of "around 5%" is met. Chinese stocks have climbed sharply lately and the yuan is its strongest this year. But these bets on a sustained recovery may be premature. Again.

The U.S. labor market appears to be deteriorating rapidly just as the country's housing market is also creaking, two negative forces that risk feeding off each other and smothering economic growth.

On the labor side, the latest sweep of data shows why the Federal Reserve is almost certain to resume its interest rate-cutting cycle this week - the unemployment rate and weekly jobless claims are both the highest since 2021, and unemployed people now outnumber available jobs for the first time in four years. 

Meanwhile, pressure in the housing market remains elevated. Average monthly mortgage payments are nearly double pre-pandemic levels, and overall affordability is near record lows. Treasury Secretary Scott Bessent said earlier this month that the government may soon declare a national housing emergency. 

He has reason to be worried. High mortgage rates and soaring rents can weigh on consumer spending, leading to lower corporate profits, and ultimately less hiring and more firing. Rising unemployment, of course, puts further downward pressure on spending, creating a vicious negative spiral. 

Adding to these worries is the fact that many homeowners can't move even if they want to, as they are locked into ultra-low mortgage rates secured in the aftermath of the pandemic. As a result, mobility is falling, just when the labor market needs a more flexible and dynamic workforce. In other words, at exactly the wrong time.