In the ever-evolving landscape of global markets, traders are keenly observing the latest developments as Wall Street futures stabilize following an unexpected reaction to the recent employment report. The latest figures, released last week, indicated a modestly weaker performance in August compared to forecasts, although this still represented an improvement over July’s data. The revisions to previous months’ figures have further complicated the outlook, leading to a cautious sentiment among investors.
Despite the mixed signals from the jobs report, which did not entirely alleviate fears of an economic slowdown or potential recession in the coming year, it also lacked the weakness necessary to prompt the Federal Reserve to consider a significant 50-basis-point interest rate cut at their upcoming meeting. Notably, key Fed officials, including Christopher Waller and John Williams, have indicated that a rate cut is likely on the horizon, with Waller suggesting that the easing cycle should be ‘frontloaded’. However, both officials have refrained from expressing urgency for a substantial cut at this time.
The market reacted with caution, as evidenced by the S&P 500’s decline of 1.7% by the end of the trading session, marking a 4.5% loss for the week—the worst performance since March 2023. This downturn underscores the typical seasonal pattern of market weakness that often accompanies September.
Asian markets followed suit, experiencing a slight dip as trading commenced on Monday. Despite the tempered expectations regarding the size of the anticipated Fed rate cut, the market continues to price in a cumulative 112 basis points of cuts by the end of the year, alongside a more substantial 235 basis points expected over the next year.
In the bond market, ten-year Treasury yields reached their lowest levels since June of the previous year, while two-year yields fell to their lowest since March 2023. However, both yields saw a slight uptick on Monday, as investors prepared for this week’s auctions, which will see $119 billion in 3-, 10-, and 30-year Treasury coupons come to market.
As the week unfolds, U.S. stock futures and European markets are experiencing a rebound, driven by several key events on the horizon. Among these is the anticipated release of Apple’s new AI-infused iPhone, set to launch on Monday, as well as a crucial televised debate between presidential candidates scheduled for Tuesday.
In the European arena, attention is focused on the European Central Bank (ECB), which is expected to announce a second rate cut of the year on Thursday. With speculation surrounding potential adjustments to the central bank’s GDP and inflation forecasts, there is a glimmer of hope for a third rate reduction as early as next month.
The Fed’s current focus appears to be shifting toward employment metrics rather than inflation concerns. This shift will be further evaluated with the upcoming Consumer Price Index (CPI) inflation report set to be released on Wednesday, which will provide insights into the ongoing disinflationary trends.
Globally, deflationary pressures remain significant, particularly from overseas markets. Recent data from China revealed a notable annual producer price deflation of 1.8% for the previous month, coupled with sluggish consumer price growth. These factors contribute to the complex backdrop against which central banks are operating as they navigate the balance between stimulating growth and managing inflation.
As investors brace for the upcoming week filled with pivotal events and economic indicators, the interplay between market sentiment, central bank policies, and geopolitical developments will undoubtedly shape the trajectory of both U.S. and global markets.
