The U.S. nonfarm payroll report for August showed modest job growth, a
slowdown in wage growth, and a relatively sharp jump in the unemployment
rate, all clear signs that the U.S. labour market is normalizing. In this
context the likelihood of the Federal Reserve raising interest rates in
September and possibly in November is diminishing.
Financial markets currently assign a probability of 93% the Federal Reserve
would keep rates unchanged at its policy meeting on the 19-20 th
of September, according to the CME FedWatch tool. Nevertheless, investor
expectations for another pause in November are lower at 52%.
Despite more evidence that the tight U.S. labour market is loosening at
last, the interest rate futures market remains undecided about whether the
Federal Reserve has one more rate hike left in the bag – and still sees
50-50 chance of one more move in November.
Last week’s economic data increasingly gave investors hope that the Federal
Reserve could hold interest rates steady this month, following a hike in
July that brought rates to their highest level in 22 years. But the Fed
hasn’t ruled out additional rate increases, and that could still happen
unless inflation slows further.
The Fed has made cooling labour demand a major objective of its tightening
cycle, with policymakers hoping that this trend could help slow wage growth
and, in turn, alleviate some inflationary pressures.
These recent economic indicators align with the notion that the U.S.
economy is approaching a so-called soft landing, reinforcing the belief
that the Fed is nearing the conclusion of its interest rate hike cycle.
Source: TradingView
The impressive rally in the U.S. stock market from the onset of the year
could be capped in the near term, as stock prices appear to be too high
relative to earnings. Recessionary fears for the U.S. economy are rising,
with fiscal and consumer spending likely to decline in 2024.
Investors sold off equities in August, triggering a correction of 9%. The
rebound over the past two weeks has reversed course as economic data is
showing a rise in inflationary pressures, just as investors were gathering
confidence the labour market is cooling and seeing a soft landing as a
probable scenario. Investors are once again focused on central bank policy,
with inflation and interest rate uncertainty, China’s economic slowdown,
and geopolitics further clouding the horizon.
Oil prices have hit their highest level in nine months after Saudi Arabia
and Russia, announced they would extend output cuts till the end of the
year. Elevated energy prices could push up inflation for services and could
potentially extend the Fed’s fight against inflation, which in turn would
add more pressure on the U.S. economy.
The turbo charged rally has clearly lost momentum since July, with stocks
unlikely to continue to run on high octane in the coming months, meaning
that the index is likely to enter a phase of consolidation in the
near-term. At this juncture in time only a break below 14,558 would confirm
the secondary up trend from the October 2022 low has reversed course and
trigger lower levels over the medium-term.
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