Macro Week Ahead: Can Stocks Hold Up if the US Economy Overheats?
Macro Week Ahead: Can Stocks Hold Up if the US Economy Overheats?
By:Ilya Spivak
Can markets still hold up if the US economy heats up, pushing inflation higher?
- Wall Street found a way to celebrate despite a less dovish FOMC than expected
- The markets and Fed officials are still far apart on rate cut bets beyond this year
- S&P Global PMI data, US PCE inflation figures take center stage from here
Stock markets continued to power higher last week despite an underwhelming policy announcement from the Federal Reserve. Wall Street found a way to celebrate the central bank even as it led the markets away from dovish mythmaking, delivering a much-anticipated interest rate cut but forecasting a more cautious path than traders envisioned.
The bellwether S&P 500 index rose 2%, while the tech-tilted Nasdaq 100 added 3.1%. Those gains came despite rising Treasury bond rates. Gains were most pronounced at the long end of the yield curve, with the benchmark 10-year rate adding 1.6%. At the front end, the more policy-sensitive two-year rate edged up 0.3%.
Stocks held up well despite a less dovish FOMC than traders wanted
The US dollar held up impressively, cementing the sense that markets read the Fed to be less dovish than might have been imagined. The euro finished the week flat against the greenback, while the Japanese yen lost 0.4%. Nevertheless, gold prices rose for a fifth week straight, marking the longest consecutive rally in nine months.
From here, the spotlight turns to September’s purchasing managers index (PMI) data from S&P global as well as the Fed’s favored gauge of US inflation, the personal consumption expenditure (PCE) index. The former is expected to show that US economic activity growth narrowly slowed this month, while the latter puts price growth at a 17-month high.
These figures will test the central bank’s core thesis: that a cooling labor market justifies rebalancing policy rates lower, reflecting a greater focus on underpinning economic growth versus fighting inflation. This shift is contingent on the bet that tariff-linked price gains will be temporary, marking a one-off adjustment.
The markets and the Fed are still far part on rate cut bets
Analytics from Citigroup suggest that US economic data has tended to outperform relative to baseline forecasts since July, painting a rosier picture than analysts’ projections. The Atlanta Fed’s closely watched GDPNow model tracking growth dynamics in close to real time echoes the sense that the US economy is accelerating anew.
If that foreshadows stronger PMI data than anticipated even as inflation continues to accelerate – an outcome already foreshadowed in consumer price index (CPI) data for the same period – the US central bank may struggle to make good on the markets’ dovish mythmaking. Traders and policymakers remain far part on where rates are heading next year.
Members of the rate-setting Federal Open Market Committee narrowly acknowledged market pricing erring on three 25-basis-point (bps) rate cuts this year, but still only marked down one such move for 2026. By contrast, the markets have priced in 65bps in stimulus, plying at least two cuts and a 60% probability of a third one.
Ilya Spivak, tastylive head of global macro, has 15 years of experience in trading strategy, and he specializes in identifying thematic moves in currencies, commodities, interest rates and equities. He hosts Macro Money and co-hosts Overtime, Monday-Thursday. @Ilyaspivak
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