Federal Reserve Governor Christopher Waller overnight urged markets to "give disinflation a chance" as global bond yields continued to push higher. Investors have responded by treating this month’s Federal Open Market Committee decision as a near coin flip between leaving policy unchanged and delivering the first rate increase in three years - an outcome every central bank prefers to have as an option.
Waller added that the August nonfarm payrolls report, due later in the global day, may not be the pivotal data point investors should focus on. Instead, he said the upcoming August CPI reading contains the real signals markets need to parse. Median forecasts currently point to a gain of 56,000 jobs for August, following a surprise drop of 23,000 in the prior month. Market participants expect the unemployment rate to remain at 4.1%, though there is a downside risk to 4.2%.
Asian markets were buoyed by relief and moved higher, with the Nikkei up 1.1%, South Korea’s KOSPI rising 1.3% and Hong Kong’s Hang Seng climbing 2.1%. At the time of writing, futures for Wall Street and European bourses were effectively flat.
Looking at policy implications, another decline in payrolls could tilt the Fed toward a pause this month, while a stronger-than-expected print would make it easier for policymakers to justify a hike. That dynamic places heightened importance on CPI and PPI releases next week, which market participants view as the deciding variables. The stakes are sufficiently high that some economists are modeling PCE inflation out to three decimal places.
In the Treasury market, short-dated yields rallied and the yield curve bull-steepened. The move reflects a market configuration in which investors in longer-dated bonds prefer the Fed to act and raise rates to curb inflation, even if that means higher short-term yields in the near term.
Market snapshots included: USD/JPY +0.28%, JP225 +1.16%, HK50 +2.07%, JPY/USD -0.3%, LCO +0.16%, KS11 +1.85%, LCOmdc1 +100.00%.
Oil prices remained near six-week highs, with Brent crude futures up about 7% on the week and trading at $95.52 a barrel. The dollar’s retreat coincided with a sharp and somewhat mysterious rally in the Japanese yen, which has appreciated roughly 2.5% this week to about 156 per dollar. That move has prompted speculation of foreign exchange checks by Tokyo or even clandestine intervention, alongside growing expectations that rate-hike prospects for the Bank of Japan are building.
Market pricing currently implies about a 75% chance of a BOJ move this month, with roughly 30 basis points of tightening anticipated by October. Those estimates raise the possibility of either a larger single increase or an unusual back-to-back set of moves.
In technology and AI developments, OpenAI released Astra, which the company describes as its most capable large language model to date and one that can perform many tasks typically run on a laptop. The release is being framed as having particular relevance for laptop makers.
Key developments that could influence markets on Friday include:
- UK S&P Global PMIs
- Eurozone retail sales for July
- U.S. nonfarm payrolls data for August
For now, markets are pinning short-term direction on these data releases and central bank signals, while oil, currency flows and Treasury moves remain closely watched for clues about the next phase of monetary policy and inflation trajectories.
Reporting and analysis focused on macroeconomic indicators, central bank communications and market reactions.