Global market sentiment continued improving this past week. On Wall Street[1], futures tracking the Nasdaq[2], Dow Jones and S&P 500[3] closed +1.84%, -0.31% and +0.23% respectively. Tech stocks saw a disproportional boost. In Europe, the DAX 40[4] and FTSE 100[5] closed +0.67% and +0.22% respectively. Meanwhile, Japan’s Nikkei 225[6] gained 1.35%.
Strong US ISM Manufacturing PMI early in the week helped cool fears of a recession by underscoring the resilience of the economy. This was then followed up by an impressive jobs report. The United States unexpectedly added 528k non-farm payrolls while wage growth also surprised higher.
But, a disconnect seems to be brewing. Since June, markets have been pricing in rate cuts from the Federal Reserve in 2023. This is despite a 75-basis point hike late last month. Rising fears of an economic slowdown seem to be boosting bets of a Fed pivot. Such an outcome might occur of inflation materially slows, but that might be a far stretch for this year[7].
As such, Fed policymakers spent most of this past week downplaying market expectations of a pivot next year[8]. This is setting up for disappointment in sentiment and the jobs report further underscored this. Looking at Fed Funds Futures, an additional 25-basis point rate hike was priced in from markets for this year.
With that in mind, the US Dollar[9], gold[10], Euro[11], Japanese Yen[12] and Wall Street are setting their sights on the next CPI report. Next week, US headline inflation is seen slowing to 8.7% y/y for July. That would be down from 9.1% prior. Worryingly, the core gauge is
