- Investors sold stocks the previous week due to economic uncertainty.
- The US payrolls report revealed the unemployment rate eased from 4.3% to 4.2%.
- Economists expect the annual US inflation figure to ease from 2.9% to 2.6%.
Equities rose 1% on Monday, recovering from last week’s plunge ahead of crucial US inflation data. Investors sold stocks the previous week due to fears about the economy after a set of poor reports.
S&P 500 weekly change (Source: Bloomberg)
Notably, the manufacturing and labor sectors showed weakness, creating economic uncertainty. However, by Monday, calm returned as markets watched for more clues on the Fed’s policy outlook.
The US economy has slowed significantly amid high interest rates. Data last week confirmed this, as the manufacturing sector remained in contraction. At the same time, employment figures revealed weaker demand for labor. Notably, job vacancies plunged, and private and nonfarm employment growth slowed.
A weak economy is bearish for stocks as businesses perform poorly. Nevertheless, poor data also signals looming interest rate cuts, which would spur growth. Unfortunately, the nonfarm payrolls report also revealed the unemployment rate eased from 4.3% to 4.2%. This lowered the likelihood of a 50-bps rate cut and created more uncertainty regarding the size of the next move. Consequently, investors preferred safe-haven assets like the dollar and the yen as the week ended.
This week, all eyes are on the US CPI report on Wednesday. Economists expect further cooling, easing the annual figure from 2.9% to 2.6%. Meanwhile, they expect the monthly figure to hold steady at 0.2%. Softer-than-expected numbers will increase the likelihood of a 50-bps rate cut. If inflation unexpectedly rises, the Fed might take a more cautious stance on rate cuts.
Moreover, investors are preparing for next week’s FOMC policy meeting. The Fed might lower borrowing costs by 25 bps or 50 bps. The smaller cut would show the economy is steady, and the central bank might achieve a soft landing. Therefore, it would boost equities. On the other hand, a supersized cut would show that the central bank is worried about a rapid slowdown.
Historically, a 50-bps rate cut has come before or during a recession. Therefore, investors might panic at such an outcome and scramble for safety, leading to a decline in equities. Moreover, September is known to be a bearish month for US stocks. Therefore, a catalyst like a supersized Fed rate cut could cause a sharp decline.
