A surprise 23,000-job loss in July and a dip in the unemployment rate to 4.1% pushed traders to cut the odds of a September Fed rate hike, even as stocks rallied to close out a strong week. That leaves next week's Consumer Price Index and Producer Price Index reports as the market's next big test, with economists expecting July CPI to hold near 3.4% annually.
Nonfarm payrolls fell by a seasonally adjusted 23,000 in July, the Bureau of Labor Statistics reported. The unemployment rate edged lower to 4.1% the same month, reshaping the interest-rate outlook and raising the stakes for next week's inflation data. Stocks rose anyway, capping a strong start to the month, as investors read the weak labor data as a sign the Federal Reserve won't raise rates in September.
Rate-hike odds tumble
Friday's report reshaped rate hike expectations for the Fed's September meeting. Traders pushed the odds of a quarter-point increase down to 42%, from 55% the day before.
The shift follows three dissenters at the Fed's July meeting who voted to raise rates. Treasury yields retreated too, with the 2-year note — which closely tracks Fed policy expectations — falling to around 4.2%, a tailwind for equities.
Inflation reports raise the stakes
Next week brings the July Consumer Price Index and Producer Price Index, two reports Art Hogan, chief market strategist at B. Riley Wealth, framed as central to the outlook. According to CNBC: "It is a picture that gets more complicated for the Federal Reserve", Hogan said.
Economists expect July CPI to rise 3.4% year over year. That's a touch softer than June's 3.5% increase, but still far above the Fed's 2% inflation target. A hotter-than-expected report would revive fears of stagflation, while a softer one would let the Fed hold steady in September.
S&P 500, Nasdaq extend gains
The S&P 500 breached fresh all-time highs twice this week, on Monday and Tuesday. The Nasdaq Composite ended the week more than 5% higher than the prior Friday.
Major averages notched their best week since April, with semiconductors rebounding from July's rout. Fundstrat's Tom Lee has argued the S&P 500 can climb to 8,000 in the coming weeks, a target roughly 3% above its level near 7,750.
Some investors also point to easing U.S.-Iran hostilities as a possible relief valve for oil prices, with many confident a deal will soon be reached to reopen the Strait of Hormuz, even without a definite timeline. With the Fed releasing less communication between meetings, next week's CPI and PPI prints carry outsized weight for markets already sitting at record highs.
Source: US Top News and Analysis
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