All eyes on Wall Street this week will be on US inflation data, with the Consumer Price Index on Thursday and the Producer Price Index on Wednesday.
The reports carry added weight after a weak August jobs report, and will be key in determining whether the Federal Reserve opts for a standard 25 basis point cut or a larger 50 basis point move at its September 17 meeting.
After August’s payrolls report showed just a 22,000 increase in jobs, recession concerns have grown and traders are betting on more aggressive easing.
“The payrolls report triggered a big recalibration in interest rate expectations in the US,” said Kathleen Brooks, research director at XTB.
“There is now a growing chance of a 50 basis point rate cut in the US on 17th September, and the Fed Fund Futures market is pricing in six rate cuts in the next 18 months.”
Bond yields tumbled following the labor data, with the two-year Treasury sliding to 3.5%, its lowest since early 2024.
Stocks ended lower, with the S&P 500 slipping 0.3% last week, while rotation out of major tech names such as Nvidia highlighted investor caution.
“Momentum in the US indices may pause as investors assess the US economic outlook,” Brooks added.
For Deutsche Bank economists, the August employment data should be sufficient to secure at least a quarter-point move, though the inflation numbers will be decisive.
“From the Fed's perspective, the August employment report should solidify a 25bp cut at the September 17 FOMC meeting,” the analysts wrote.
“That being said, this week’s inflation data will be important with respect to potential revisions to the Fed’s latest Summary of Economic Projections.”
Consensus forecasts call for headline CPI to rise to 2.9% year-over-year, with the core rate steady at 3.1%.
Deutsche Bank expects a 0.36% increase in headline CPI relative to a 0.32% gain in core, with shorter-term trends in core inflation showing some deterioration.
The bank also pointed to tariff-driven price pressures in goods and expected continued strength in categories such as airfares.
Markets have downplayed inflation risk in recent weeks as oil prices fell and gold surged to record highs on stagflation fears.
“Either gold is overvalued, and stagflation fears are overdone, or the rest of the market needs to play catch up,” Brooks warned. “The US CPI release later this week will be pivotal to determine what happens next as stocks are poised on a precipice.”
Earnings will be sparse this week, but investors will see results from Kroger, Adobe, GameStop, and Chewy.