- Traders were optimistic after Middle East talks resumed.
- The US economy unexpectedly lost 23,000 jobs in July.
- The US CPI report might show the headline figure at 3.4%.
Equities edged higher on Tuesday, extending Friday’s rally after a poor US jobs report. At the same time, hopes for a deal to reopen the Strait of Hormuz improved risk appetite, which saw stocks end the best week since April. This week, the US CPI report due on Wednesday will continue to shape the outlook for Fed policy.
All of last week, traders were optimistic after negotiations between the US and Iran resumed and their conflict paused. The two, including Oman, discussed reopening the Strait of Hormuz and managing traffic. At the same time, some reports indicated that the US and Iran could resume their 60-day ceasefire deal and nuclear talks.
The pause in the war and resumption of talks sent oil prices tumbling, which eased inflation worries. As a result, bets on a Fed rate hike dropped and equities rallied. However, the US Treasury Secretary had suggested last week that a deal would be reached during the week. By Monday, investors were losing hope for a near-term deal. Meanwhile, Iran said it would not negotiate with the US, citing violations of their June 17th ceasefire deal. Consequently, the momentum of the bullish rally weakened in the new week.
Furthermore, traders assessed Friday’s US jobs numbers, which completely missed the estimates. According to the report, the economy lost 23,000 jobs in July, compared to the forecast of 85,000 new jobs. On a normal day, such a report would have sent equities lower on fears of a rapid economic slowdown.
However, the focus was on Fed policy. A weak labor market gives policymakers less room to hike rates. Therefore, borrowing costs will remain at low levels for longer. If inflation rises, the Fed will have to balance it with growth.
“For the job market this is a number that’s not booming and may actually be breaking, but for the markets the two biggest areas of concern were yields and inflation,” Saira Malik, Nuveen chief investment officer, said on CNBC’s “Squawk Box.” “This lower number helps not reinforce the Fed’s narrative that they need to raise interest rates.”
US inflation estimates (Source: BLS, Bloomberg)
On Wednesday, the US CPI report might show monthly inflation edging up and the headline figure at 3.4%, down from the previous 3.5%. These figures will further shape the outlook for monetary policy in the US.
