Markets are showing a positive tone heading into today, largely fuelled by expectations that upcoming jobs data may finally justify interest rate cuts by the Federal Reserve as soon as mid-September. The US nonfarm payrolls is expected at 1.30pm, a weak report would increase the odds of a rate cut in September. The consensus among economists is for nonfarm payrolls to have increased by about 75,000 jobs in August, which is only slightly above July’s 73,000 and well below last year’s monthly average of 128,000. However if the report is accompanied by strong average hourly earnings, the Fed is less likely to cut rates because strong hourly earnings is associated with rising inflation. The Fed is unlikely to cut rates if inflation is on the rise.
The S&P 500 has already hit a new record close, while the Nasdaq and Dow are also climbing, supported by optimism around rate cuts and solid earnings from key tech names. Investors could be disappointed today, there are signs inflation is ticking up. Furthermore while short-term yields are easing, long-term rates remain somewhat elevated—creating a “tale of two bond markets.” This could tip sentiment if long-term inflation expectations linger.