Stocks rally ahead of key jobs and inflation data

US stocks rallied across the board by midday, led by the Russell 2000. The dollar maintained recent strength, even as bond yields fell back. Chinese equity markets rebounded after recent weakness after measures announced this weekend to bolster its capital markets. Traders are looking ahead to inflation data on Thursday and the key jobs report on Friday.

Bottom-line: risk-on.

TODAY’S MAJOR NEWS

Inflation and jobs reports will set the tone for financial markets

Two economic statistics will obsess traders this week and impact the Fed’s next interest rate decision, due on September 20. Key data includes: the Personal Consumption Expenditure (PCE) index, excluding food and energy, forecast at 4.2% year-on-year in July, after 4.1% in June; and, the Farm Payrolls, forecast at 170,000 after 187,000 in July (undershooting the 200,000 forecast.) Any strength in either would be bad news. The CME’s Fedwatch tool, which expresses the market’s view on official rates, still puts just a one in five chance in rates being hiked by 25 basis points, but a one in two chance that this happens at the November meeting.

Powell’s clear message on reducing inflation

Fed Chair Jerome Powell sounded a quite specifically hawkish tone on Friday, when he addressed the economic symposium at Jackson Hole, Wyoming. He admitted that the Fed’s monetary policy thus far had been minimally effective at reducing consumer spending, or reducing inflation in a service sector heavily dependent on a tight labor market. The “higher for longer” rate message came through loud and clear in Powell’s comments, as he restated the central bank’s absolute commitment to the 2% inflation mandate.

Chinese stocks rally on official moves to support capital markets

China announced measures over the weekend aimed at bolstering confidence in China’s capital markets. While stocks surged higher to start the week, gains were erased before the end of the session. China cut its stamp duty in half, reducing transaction costs for market participants buying Chinese stocks; analysts estimate that the move could return 130 billion yuan (US$17.83 billion) to investors in the form of waived fees. China also lowered margin requirements for investors buying equities to 80% of value from 100% previously. Profits at China’s major industrial firms are continuing to improve, but they remain nearly 16% lower than the previous year.

Dallas Fed reports continued Texan slowdown

• The Dallas Fed manufacturing index came in at -17.2 for August, showing a continuing contraction in the Lone Star state
• A breakdown of the survey found little for Texans to get excited about: production, new orders, capacity utilization, shipments and capital expenditures all continued to see contraction
• The labor market is also expected to see slow employment growth in the Texas manufacturing sector, with just 18% indicating net hiring conditions
• Worryingly, wage growth continued to accelerate, and raw material costs rose this month

TODAY’S MAJOR MARKETS

Equity markets continued Fridays rally

• Equity markets rallied this morning continuing Friday’s strength, with the S&P 500, Nasdaq and Russell 2000 up 0.5%, 0.6% and 0.7% respectively
• Global markets were stronger overnight, with the Nikkei 225 up 1.7%, the DAX up 1.0% and the FTSE 100 up 0.1%
• The VIX, Wall Street’s fear index, fell back to 15.1

Bonds rally, dollar unchanged

• Bond yields fell back, with 2- and 10-year bonds at 5.05% and 4.22% respectively
• The dollar index was unchanged at 104.1
• Sterling and the Euro were up 0.2% versus the dollar, while the Yen was unchanged

Oil and Gold rally

• Crude oil prices continued to rally, up 0.4%, to $80.1 per barrel
• Gold rallied, up 0.4% at $1,947 per ounce, while Silver was up 0.1% at $24.3 per ounce
• Wheat prices fell to new lows for the move with downside momentum continuing to drive this market as Russia continues to dump wheat onto the market at a record pace
• Corn and soybean prices found modest support from Friday afternoon's release of the Pro Farmer crop tour estimates that came in below market expectations, combined with continued dry forecasts for the Midwest over the next two weeks

Analysis by Arlan Suderman, Chief Commodities Economist: Arlan.Suderman@StoneX.com 

Market outlook by Paul Walton, Financial Writer: Paul.Walton@StoneX.com