Stocks Eye US Inflation After Grim Jobs Data: Macro Week Ahead
Stocks Eye US Inflation After Grim Jobs Data: Macro Week Ahead
By:Ilya Spivak
Will US inflation data help or hurt confused stock markets before this month’s critical Fed rate decision?
- Stock markets struggled with how to interpret August’s dismal US jobs report
- Inflation is now at center stage, with PPI and CPI data set to shape Fed views
- FOMC officials and the markets are increasingly at odds on rates beyond 2025
Wall Street seemed unsure of what to make of a deeply disappointing US jobs report last week, even as the outcome fueled sharp moves for Treasury bonds, gold, and the US dollar amid a shift in Federal Reserve policy bets. Inflation data now comes into focus as traders count down to the US central bank’s next announcement on September 17.
The Bureau of Labor Statistics (BLS) reported that the economy added just 22,000 jobs to nonfarm payrolls in August. This might have been the worst outcome in five years, were it not for revisions that pulled June’s rise down to just 14,000 from the initially reported 147,000. The unemployment rate rose to 4.3%, as expected.
Stock markets left confused after weak US jobs data
Stocks seesawed, first cheering the likely encouragement of Fed interest rate cuts in the wake of such a weak result, then tumbling amid worries about a looming economic downturn. When the dust settled, the S&P 500 finished the trading day down 0.32% while the tech-tilted Nasdaq 100 managed to erase intraday losses for a nearly flat close (+0.07%).
Meanwhile, borrowing costs tumbled across the Treasury yield curve as gold prices continued to rally and the US dollar fell, sliding 0.61% against the euro and 0.73% against the Japanese yen. The greenback held up impressively well on the week however, ending it little-changed on net even as rates two- and ten-year paper fell 3.1% and 3.7% respectively.
Benchmark Fed Funds futures show markets are now certain that the Fed will cut rates by at least 25 basis points (bps) next week. The probability of that outcome is implied at 88.2%. The likelihood of a jumbo-sized 50bps reduction stands at 11.8%. A total of 63bps is now priced in by year-end, signaling at least two cuts and a 52% chance of a third one.
All eyes on US inflation data before critical Fed meeting
Against this backdrop, the spotlight now turns to August’s US inflation data. First, producer price index (PPI) figures are expected to produce a slowdown in wholesale price growth after a soaring jump in July. Then, the higher-profile consumer price index (CPI) report is seen putting headline inflation at 2.9% year-on-year, the highest since January.
With this month’s Fed move looking increasingly like a foregone conclusion, the forecast update from the policy-steering Federal Open Market Committee (FOMC) is the likelier object of speculation. A gaping chasm has opened between central bank officials, who see just one 25bps cut next year, and the markets, where 76bps in easing is priced in.
Stocks may decline while the US dollar launches higher if this week’s data signals that worries about sticky price growth will hold officials back from shifting forecasts toward the markets’ baseline. Meanwhile, the Treasury yield curve might flatten as rate cuts shift further out along maturities. This may help gold prices hold their ground.
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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