Markets climb despite labor data revisions and inflation concerns
Summary
The stock market shrugged off additional signs of a slowing labor market, including a 911,000 downward revision in the Bureau of Labor Statistics' (BLS) semiannual revision update. With the S&P 500 hitting another record on Thursday and gaining 1.6% over the week, the year-to-date return of the S&P 500 is 13.0%. CPI increased by 0.35% in August, bringing annual inflation to 3.11%, matching forecasts.
The Federal Reserve is expected to reduce interest rates by 25 basis points (bps) next week, with the possibility of two or three additional members expressing more dovish viewpoints. The 10-year Treasury yield decreased again, this time by four bps, to close at 4.06% on Friday.
Signs of labor slowdown
According to the BLS, the U.S. added 911,000 fewer jobs in the year ending in March than previously reported: the largest preliminary downward revision on a percentage basis since 2009. The report, which uses tax filings instead of survey data, showed that the leisure and hospitality sector, along with retail and professional services, saw the most significant overestimations. The final revision will be released in February.
Initial jobless claims rose to 263,000 last week, ending September 6, exceeding economists' forecasts of 235,000. This increase from the previous week's 236,000 filings adds to concerns that the labor market continues to slow.
Current labor market data has not yet shaken confidence that any weakness will be short-lived and ultimately offset by the positive impact of Fed rate cuts. However, questions remain about whether this softness could evolve into a broader recession.
FOMC preview
The markets are expecting a 25 bp cut in next week’s FOMC meeting with the possibility of two or three dissenters supporting a larger cut. Inflation remains elevated but is expected to be short-lived and mainly tariff-driven.
We will also receive an updated Summary of Economic Projections (SEP), which appears to be tracking closely with the June report: 1.4% GDP growth, 4.5% unemployment, and 3.1% PCE inflation. The updated dot plot will likely show divisions among policymakers, with the median forecasting one or two additional cuts this year.
The week ahead
The key events next week are the Fed meeting on Tuesday and Wednesday, followed by decisions from the Bank of England on Thursday, and the Bank of Japan on Friday.
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