US Markets Fall Despite Inflation Data Miss – Dow down 0.86%
US equity markets experienced a volatile trading session yesterday as weaker-than-expected inflation data initially supported risk sentiment before broader concerns weighed on the major indices. The Fed’s favoured inflation indicator, the Core PCE Price Index, came in lower on both the monthly and yearly numbers, leading to a sharp recalculation of market pricing. However, much of the initial reaction was later undone as markets continued to price in further volatility. The Dow Jones declined 0.86% to close at 50,906, while the S&P 500 fell 0.25% to 7,651. The Nasdaq outperformed, gaining 0.24% to finish at 26,861.
US Treasury yields ultimately moved higher despite a significant reduction in near-term Federal Reserve rate-hike expectations. The policy-sensitive 2-year yield rose 1.1 basis points to 4.887%, while the benchmark 10-year yield climbed 4.9 basis points to 5.285%.
The US dollar also strengthened, with the Dollar Index gaining 0.08% to close at 101.46, having also dropped initially on the data update.
Commodity markets delivered mixed results. Oil prices advanced amid limited signs of progress towards a peace agreement between the US and Iran. Brent crude increased 0.92% to $103.53 per barrel, while WTI gained 1.14% to $90.41. Gold initially rallied following the softer US inflation figures but subsequently reversed those gains, closing 0.59% lower at $4,155.99.
US Employment Data Now Comes into Focus
The Fed’s favoured inflation data came in lower than expected yesterday to knock back expectations of a rate hike from the Fed this month. However, US employment data will take centre stage tomorrow, with the September jobs report potentially proving decisive for expectations around the Fed’s October rate decision.
Markets are looking for Non-Farm Payrolls to rise by around 90,000, well below August’s 162,000 increase, while the Unemployment Rate is expected to hold at 4.1%. Average hourly earnings are forecast to rise 0.3% month-on-month, putting wages firmly on traders’ radar alongside the headline payroll number.
The release comes at a crucial time for Fed pricing. Expectations for another rate hike have dropped sharply following softer inflation numbers, with markets now pricing only around a 40% chance of a 25-basis-point increase in October, down from roughly 70% a week ago.
That leaves plenty of room for repricing tomorrow, with traders now expecting odds to be as volatile as they were for last month’s meeting in the coming weeks.
A strong payroll number, particularly if accompanied by hotter wage growth or a lower unemployment rate, could quickly put another Fed hike back on the table. That would likely push Treasury yields and the US dollar higher, while potentially creating renewed pressure on equities and gold.
Conversely, a significant downside miss — especially alongside softer wages or a higher unemployment rate — could see October hike expectations fall sharply and trigger the opposite reaction across markets.
Quieter Calendar Day Ahead of Non-Farms
The economic calendar is relatively quiet today ahead of tomorrow’s key US employment report. However, several central bank officials are scheduled to speak during the European and US sessions, potentially generating further volatility across currency and fixed-income markets.
On the data front, we have the Swiss CPI numbers (exp. 0.0% m/m) due out early in the London session and the usual Weekly Unemployment Claims (exp. 201k) data and ISM Manufacturing PMI (exp. 54.8) figures out of the US early in the New York day. However, the central bank updates have the potential to be more impactful.
We are set to hear from some European big hitters during the day, including the Bank of England’s Andrew Bailey, the ECB’s Christine Lagarde and the SNB’s Martin Schlegel, as well as several Fed members in the latter session.
