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Investors are squarely focused on Friday’s US non-farm payrolls after a troubling set of July jobs numbers.
The data, out in early August, showed that only 73,000 jobs were added, while the previous two months’ numbers were revised down by 258,000, bringing monthly average payroll growth between May and July to just over 35,000.
The concern over the labour market that followed prompted rate markets to start pricing in a greater chance of an interest rate cut as soon as September. It also prompted President Donald Trump to fire Erika McEntarfer, head of the Bureau of Labor Statistics — a controversial move that panicked some investors.
Although Fed chair Jay Powell hinted that the central bank would go ahead with a September cut in his Jackson Hole speech, investors understand that this will be conditional on the August jobs report. Should it come in above expectations and show that the labour market is not under immediate pressure, other signs in the economy suggest that the Fed could stay put. Inflation is lingering and growth is still reasonably strong, as shown by last Thursday’s upward revision to second-quarter GDP.
Economists polled by Reuters expect 70,000 jobs to have been added in August. A downward miss, and a potentially large downwards revision, could firm up the market’s current interest rate expectations, or potentially push traders to price an even bigger cut in September. But stronger numbers may put a damper on markets’ enthusiasm — and frustrate the president’s unorthodox push for a cut. Aiden Reiter
Will August inflation quash lingering hopes of another ECB cut?
Since the European Central Bank’s decision in July to keep interest rates unchanged — ending a series of quarter-point cuts that halved its policy rate to 2 per cent — traders have dialled back their expectations of another cut before the end of the year.
August inflation data, to be released on Tuesday, will be the “last chance saloon for ECB doves”, said advisory firm Pantheon Macroeconomics, arguing that a softer than expected print could bolster the case for another cut.
Financial markets are pricing in a less than 3 per cent probability of a quarter percentage point reduction at the ECB’s next meeting on September 11. Any further cuts at all this year are seen as unlikely.
Economists polled by Reuters expect August inflation to come in bang in line with the ECB’s medium-term 2 per cent a year target for the third month in a row, while economic activity on balance has been slightly better than expected.
In Germany, the Eurozone’s largest economy, annual inflation rose to 2.1 per cent in August, up from 1.8 per cent in July and just above the 2 per cent expected by economists.
Analysts at Goldman Sachs said on Thursday that inflation expectations in the euro area “appear well-anchored” as a post-pandemic surge in prices has petered out. “This is consistent with our expectation that inflation will converge back to 2 per cent,” they said.
Will Swiss inflation prompt bets on negative rates?
Investors will be watching Swiss inflation data for clues about whether policymakers will be forced to resort to negative interest rates to support the economy, as Switzerland grapples with the impact of steep US tariffs.
Economists polled by Reuters expect 0.2 per cent year on year inflation in August, which would be unchanged from July’s figure.
Switzerland has faced stubbornly low inflation this year, prompting the central bank to cut its policy rate to zero in June. Markets are pricing in a 90 per cent chance that policymakers will hold rates steady in September — although a minority of traders are betting on a fall into negative rates.
Inflation briefly turned negative in May, with a reading of minus 0.1 per cent year on year.
A 39 per cent “reciprocal” tariff on its exports to the US came into effect in August, while economic growth has slowed sharply. At the same time, the Swiss franc has surged this year, as investors have sought haven currencies amid global market volatility, putting further downward pressure on Swiss inflation.
“There is a risk that Swiss inflation turns out below consensus estimates,” said Tomasz Wieladek, chief European macro strategist at T Rowe Price.
He added that the Swiss purchasing managers’ index, a closely watched indicator of economic activity, showed tumbling sentiment in the services sector after the latest US tariff announcement.
“If this sentiment is reflected in actual demand, core inflation may weaken again,” Wieladek said. If so, the central bank could be forced to consider a return to the world of negative rates, he added. Emily Herbert
