Fed Rate Path Firms as Jobs Data and Oil Prices Rise
Strong August jobs data and rising oil prices from the Iran conflict have increased market expectations for Federal Reserve rate hikes, offsetting a
Federal Reserve rate hike expectations have firmed following a surprisingly strong August jobs report. Market pricing now implies nearly 40 basis points of tightening this year, up from under 30 basis points a week ago, according to analysis from Nasdaq's Chartstopper.
Fed Governor Chris Waller recently signaled a patient approach, stating he was open to leaving rates unchanged if recent disinflation continues. He paraphrased John Lennon, saying the Fed should "give disinflation a chance."
Jobs Data Shifts Expectations
The August employment report dramatically shifted the calculus. The economy added 162,000 jobs last month, nearly triple the consensus expectation of 55,000. Revisions to the prior two months' data also turned July's job change into a positive figure. This strength supports the view, expressed last Friday by Chair Kevin Warsh, that inflation remains the central bank's primary focus.
Geopolitics Fuels Inflation Pressure
Geopolitical conflict is adding to inflation concerns. Hopes for a near-term ceasefire in the Iran conflict are fading after continued military exchanges and attacks on oil tankers in the Strait of Hormuz. The U.S. Administration will not accept a simple return to an expired agreement and would require a new deal covering both the strategic waterway and Iran's nuclear program.
As a result, U.S. Oil prices have surged over $5 in the past week, pushing back above $90 per barrel to near three-month highs. This rise in a key commodity price complicates the Federal Reserve's task of managing inflation.
Strong Earnings Offset by Rates
The second-quarter corporate earnings season concluded with strong results. Mega-cap company AVGO capped the period by beating earnings estimates with nearly 100% year-over-year growth. This performance helped the Nasdaq-100 index finish the quarter with aggregate earnings growth of almost 80% per annum.
Despite this powerful earnings momentum, concerns over inflation and higher interest rates weighed on equity markets. The Nasdaq-100 finished the week flat, while the yield on the 10-year U.S. Treasury note rose about 5 basis points to 4.8%.
Key Data Releases Ahead
Investors are now looking ahead to several key economic releases for further signals on the economy and inflation path. The upcoming data calendar includes:
The August Consumer Price Index report on Friday will be particularly critical for shaping the near-term trajectory of monetary policy.
