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Senior Market Analyst
Fed rate hike odds sit near 80% after U.S. nonfarm payrolls showed 165,000 jobs added against a forecast of 65,000, making U.S. CPI data the key test of how firmly markets keep pricing a Federal Reserve hike. Unemployment fell to 4.1% from 4.2%, reinforcing the picture of a labor market running stronger than expected. U.S. equities were already under pressure, with the Nasdaq down 5.5% and the S&P 500 down 4.1% in a single session after the U.S. midterm elections. That combination gives the next inflation readings added weight for stocks and the U.S. dollar.
Fiona Cincotta, StoneX Senior Market Analyst, covers forex, equities and commodities, with a focus on macroeconomics and central bank policy across UK, European and U.S. markets. That coverage gives insight into how U.S. jobs data, inflation releases and Federal Reserve rate expectations are feeding into equity and currency markets.
U.S. nonfarm payrolls rose by 165,000, well ahead of the 65,000 forecast, adding weight to market pricing for a Federal Reserve rate hike. Unemployment also edged lower to 4.1% from 4.2%, a move Cincotta describes as a surprise. The market-implied probability of a Federal Reserve hike holds around 80%, placing the focus squarely on the inflation data that follows.
U.S. CPI inflation is forecast to slow to 0.3% month on month from 0.6%, with core inflation expected to ease to 0.2% from 0.3%. On an annual basis, Headline CPI is seen rising 2.6%, Core CPI is forecast at 3.7%. These consensus forecasts imply only a modest cooling in price pressure. September’s significant rise still leaves room for an upside surprise against those forecasts. U.S. producer price index data is also expected to come in slightly cooler, while still adding to inflation concerns.
Hotter-than-expected U.S. CPI data risks cementing Federal Reserve rate hike expectations, creating headwinds for U.S. equities. In that scenario, Cincotta notes that "stocks could come under pressure and we could see the US dollar push higher." The equity market enters that test already bruised, evidenced by the Nasdaq's 5.5% fall after the U.S. midterm elections. Its partial rebound reflected markets "de-risking rather than completely reassessing the fundamental outlook for the AI trade," which makes inflation data a fresh source of pressure rather than the original cause.
Federal Reserve rate hike pricing responds most directly to the U.S. consumer price index, core CPI and the producer price index. U.S. nonfarm payrolls and the unemployment rate show the strength of the labor market behind those inflation readings. Specifically, the gap between each release and its consensus forecast shows if price pressure is building or fading. The U.S. dollar and the Nasdaq show how quickly markets translate those surprises into rate expectations.
--- Written by Frédéric Guétin, StoneX Media Producer
--- Expert: Fiona Cincotta, StoneX Senior Market Analyst
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