Markets Shrugged Off the Best Data Since 2022. That is a Tell.

The markets ignored white-hot US economic activity data after readily repricing amid three weeks of soft news-flow. Will Jackson Hole confirm their fears?

• Friday’s US PMI data showed the fastest US economic activity growth since 2022, led by the services sector, and markets scarcely reacted
• Headline odds of a rate hike by December look emphatic at 92%, yet every individual meeting is close to a coin toss
• Kevin Warsh gives his first Jackson Hole address as chair, and vagueness may be the most dovish thing he can offer

Markets opened the week quietly. The bellwether S&P 500 idled after a pullback to chart support just above 7600. The tech-heavy Nasdaq 100 looked soggier, slipping to its lowest close in three weeks. Crude oil eased back from a one-month high after Treasury Secretary Scott Bessent unveiled a sanctions campaign against Iran while long-dated Treasury bonds marked time in the narrow range containing them throughout August. Gold lazily drifted up to another three-month high, while US dollar sat anchored against an average of its top currency counterparts.

This broadly muted price action seemed to echo the almost eerie quiet on display late last week, when markets seemed to sleep through explosive US economic data. Friday brought the S&P Global purchasing managers index (PMI) survey of US business activity. It showed the fastest expansion since 2022, powered by a revival in services, which is precisely the healthy composition that markets might have been expected to cheer. Traders responded with a shrug, pausing a dovish repricing in Fed policy expectations since the beginning of the month, and little else.

Good news is noise, bad news is signal

This points to an unmistakable asymmetry. Three weeks of disappointing data releases this month have unmistakably moved rate expectations, the dollar, and precious metals. The single strongest reading in nearly four years moved almost nothing. A market that ignores evidence against its thesis while acting on every scrap that supports it seems to have already reached a verdict, and that appears to bode ill for US consumers.

The case has been building for weeks. Retail sales data disappointed, consumer confidence sagged, and both retail (CPI) and wholesale (PPI) inflation showed demand-side pressure fading independently of the widely expected washing out of the Iran war’s oil shock from the figures. Households appear to be pulling in their horns, and since consumption accounts for roughly 68% of output, a real retrenchment ought to easily overpower the uplift from the feverish buildout of artificial intelligence (AI). Against that, one strong month of PMI data reads as an outlier rather than a refutation.

Why 92% odds of a rate hike are misleading

Nowhere is the lack of conviction clearer than in rate pricing. Futures imply a 92% chance of at least one hike by December, a number that sounds decisive until it is taken apart. That figure is cumulative, stacking the odds of a move at each meeting between now and year-end. Unstack it and September sits near an even split leaning toward a hold, October is a coin toss, and December carries standalone odds of roughly 45%. There is no meeting on the calendar through the end of next year where traders hold better than even conviction in any single outcome.

The drift has been steady. Probabilities of one, two and three hikes by December have all faded since the start of August, and they faded in lockstep with gold’s rally and the dollar’s slide. Worth noting is that those two moves began weeks before last week’s Treasury bond buyback intervention, so whatever they are pricing, it is not the latest yield suppression effort from Scott Bessent.

The data underneath keeps disappointing

The Citigroup economic surprise index, which measures data against forecasts, has turned steeply lower, meaning analysts keep setting the bar higher than the economy can clear. The Atlanta Fed’s GDPNow model tells the same story: third-quarter figures are not due until October, so the level matters less than the trajectory, and that has pointed downward as each new release lands since the month began.

The bond market has drawn its own conclusion. Breakeven inflation rates tracked crude oil closely through the first half of the year, rising when the US-Iran war erupted and falling as traders flirted with the idea of the conflict ending. Crude has since rebounded toward its wartime highs, and breakevens have refused to follow, stuck near where they began the year. The markets seem to be saying that – fraught geopolitics notwithstanding – a disinflationary force looms on the horizon, and an economic downturn may well be it.

What Warsh can say at Jackson Hole

The catalyst that seems to matter most from here comes Friday, when Kevin Warsh delivers his first keynote address as Fed chair at the central bank’s annual Jackson Hole symposium. The outing is traditionally where the chair hands the markets a lens through which to read policy, as awkward as that sounds for a central bank leader that has made his distaste for forward guidance a defining principle.

What traders may end up with is another exercise in strategic vagueness, which they may well interpret to mean that the Fed feels no urgency to commit one way or another. Keeping things deliberately unclear buys the committee time, which markets already questioning officials’ appetite for rate hikes may read as permission to keep pushing the dollar lower and the metals higher. That might leave stocks faced with the uncomfortable possibility that the policy outlook is turning more dovish because the economy is buckling. Such a realization threatens to send them lower.

Ilya Spivak, tastylive Head of Global Macro, has over 15 years of experience in trading strategy. 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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