Key facts
- Markets are uncertain about the Federal Reserve's next interest rate move, with a coin flip scenario for a pause or hike.
- Fed Governor Christopher Waller indicated that upcoming CPI data, not the August non-farm payrolls report, is more crucial for assessing inflation.
- Economists forecast 56,000 jobs added in August, with the unemployment rate potentially rising to 4.2%.
- Asian stock markets saw gains, while U.S. and European futures were flat.
- Short-term Treasury yields rose, and the yield curve steepened.
- Oil prices remained near multi-week highs, and the U.S. dollar weakened against the yen.
- The Bank of Japan is increasingly expected to raise interest rates soon.
Global markets are navigating mixed signals ahead of key economic data, with Federal Reserve Governor Christopher Waller suggesting that the upcoming Consumer Price Index (CPI) report, rather than the August non-farm payrolls, will be more indicative of the inflation trajectory.
Markets are currently pricing the Federal Reserve's upcoming interest rate decision as a 50/50 probability between a pause and a hike, a scenario that central banks generally aim to avoid. The median forecast for U.S. non-farm payrolls anticipates an increase of 56,000 jobs for August, with the unemployment rate expected to remain at 4.1%, though a rise to 4.2% is a possibility.
Asian stock markets reacted positively to the news, with Japan's Nikkei rising 1.1%, South Korea's KOSPI up 1.3%, and Hong Kong's Hang Seng jumping 2.1%. Futures for Wall Street and European markets were largely flat.
Despite the focus on payrolls, a significant miss could influence the Fed's decision towards a pause, while a strong report might provide cover for a rate hike. However, the ultimate variable is expected to be next week's CPI and Producer Price Index (PPI) readings.
In response to the shifting outlook, short-term Treasury yields rallied, and the yield curve experienced a bull-steepening. Oil prices held near six-week highs, with Brent crude futures climbing 7% for the week to $95.52 a barrel.
The U.S. dollar's retreat has coincided with a notable rally in the Japanese yen, which has gained 2.5% this week to trade at 156 per dollar. Speculation is mounting regarding potential foreign exchange checks by Tokyo or even covert intervention, alongside growing expectations for the Bank of Japan to tighten its monetary policy.
The Bank of Japan is now about 75% likely to implement a policy move this month, with a 30 basis point tightening anticipated by October, raising the possibility of a larger increase or a rare consecutive move.
In the technology sector, OpenAI announced the release of Astra, its latest large language model, which the company claims can perform most laptop tasks.