A Look at the Day Ahead in European and Global Markets by Wayne Cole
Asia had a rough start, catching up with Wall Street’s reaction to the U.S. jobs report. Japan’s Nikkei dropped another 1.7%, adding to last week’s nearly 6% decline. However, S&P 500 futures managed to recover from early losses, rising 0.3%, while European equity futures were slightly higher ahead of an expected rate cut from the European Central Bank (ECB) on Thursday. U.S. Treasury yields have also recovered somewhat, and the dollar gained ground against the safe-haven yen.
Chinese economic data did little to lift the mood, as producer prices fell 1.8%, a sharper drop than the forecasted 1.4% decline. Consumer prices rose by 0.6% year-on-year in August, mostly driven by food prices, with goods prices increasing by just 0.2%. While this supports the trend of global disinflation, it also signals weak domestic demand, which led to a 1.3% drop in Chinese blue-chip stocks.
Looking ahead, the U.S. Consumer Price Index (CPI) report for August is set for release on Wednesday. Forecasts suggest the headline inflation figure will slow to 2.6%, the lowest since March 2021, far below last year’s peak of 9.1%. Forecasts range from 2.4% to 2.6%, suggesting that the risk is leaning towards a softer outcome.
A weaker-than-expected CPI result could fuel speculation that the Federal Reserve may consider a larger 50-basis-point rate cut next week, with futures currently pricing in a 31% chance of such a move. A smaller 25-basis-point cut is fully priced in, with markets expecting 112 basis points of rate cuts by the end of the year.
However, Fed officials didn’t seem eager for a larger cut. Governor Christopher Waller indicated that he would only support “front-loading” rate cuts if upcoming data shows further signs of weakness in the labor market. Given that there’s little significant labor data between now and the Fed’s next meeting on September 18, markets remain on edge.
The U.S. unemployment rate stood at 4.2% in August, with 142,000 jobs added, which isn’t indicative of a recession. However, the downward revision of 86,000 jobs in the previous two months has raised concerns that August’s figures may be revised down as well. The three-month average job growth also slowed to 116,000, below the 200,000 needed to keep the unemployment rate from rising.
A further challenge for the Fed is its November 7 meeting, just two days after the U.S. presidential election. With uncertainty surrounding the election outcome, deciding on a potential 50-basis-point rate cut in such a politically sensitive environment could be difficult.
This highlights the importance of the upcoming debate between Kamala Harris and Donald Trump on Tuesday evening, which could shape market sentiment in the days to come.
Key Market Drivers on Monday:
- Euro Zone Sentix Index for September
- ECB Board Member Elizabeth McCaul’s “Fireside Chat” in New York
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