US markets shut for Labor Day holiday as investors eye nonfarm payrolls report due at the end of the week 

A busy week but a relatively quiet day – US markets are shut for the Labor Day holiday. All eyes are on the nonfarm payrolls report at the end of the week. We should make Labor Day a market holiday in the UK too.

With markets all but certain the Federal Reserve is going to cut rates in September after Jay Powell’s dovish speech in Jackson Hole, the question is one of how fast and how deep does the US central bank need to go.  

The disappointing July payrolls report helped spark a market correction in early August, after triggering the “Sahm rule” that has correctly predicted previous recessions. Subsequent revisions to Bureau of Labor Statistics (BLS) data suggests the labour market is even weaker than previously thought.  

GDP data, however, suggests there is no need to go too big with the cut.  Market pricing suggests the odds of a 50 basis points (bps) are at 31%, with 25bps at 69% and a full 100bps of cuts this year about 68% priced. I think 50bps suggests panic, which isn’t really how the Fed is feeling right now.

Stock markets recover after scare in early August

European stock markets turned cautious early on Monday but are coming off record highs hit last week in the wake of some soft Eurozone inflation data. Wall Street also rallied on Friday as the Fed’s preferred measure of inflation came in cool.  

In general stock markets recovered well in August after the big wobble at the start of the month. The DAX set a fresh record in August, as did the wider Eurostoxx 600 and the Dow Jones industrials. The S&P 500 index closed higher on the month by more than 2%, notching its fourth straight winning month. The FTSE 100 moved to within a whisker of its all-time high – 8,474.41 set on May 15th. 

Eurozone inflation falls, PMIs soft, case for another European Central Bank rate cut building

Eurozone inflation dropped to a three-year low of 2.2% in August, down from 2.6% in July. The core rate fell to 2.8% in August from 2.9% in July. US PCE inflation was in line at +2.5% and the core was a little light at 2.6% vs 2.7% expected. Good news for the Fed is it pins its colours to a rate cut in September. 

Eurozone manufacturing PMI data out on Monday was very soft and continues – along with the inflation data – to build the case for the ECB to cut again in September. Soft Chinese manufacturing data showing activity at a 6-month low in August heaped pressure on basic resources stocks early on Monday in London.

Rise of the right in Europe

A big theme this year on the Overleveraged podcast has been the rise of the right in Europe and what it could mean in terms of fragmentation of the political centre. President Emmanuel Macron is finding out how tough it is to go against the electorate and not look like a tyrant. And in Germany, too, things are changing. The “Alternative for Germany” (AfD) won Thuringia, the first time a far-right party has topped a German state election since the Second World War. The party came second in Saxony.  

Elsewhere, the dollar is coming off a bit this morning after rallying for three straight days. Note the bullish MACD crossover.

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