Market bets put the probability of a September Federal Reserve rate increase at roughly two-thirds. Against that backdrop, Barclays strategist Emmanuel Cau highlighted two incoming data releases as the most likely triggers to change that consensus: the payrolls print published today and next week’s consumer price index.
"Today's payrolls report and next week's CPI release will be crucial. Any meaningful downside surprise could still alter the market's policy expectations, in our view," Cau wrote in a note to clients on Friday.
Barclays' economics team has already adjusted its policy outlook, now projecting two additional Fed rate hikes this year, in September and December, according to the firm. That forecast aligns broadly with current market positioning heading into the jobs report, but Cau cautioned against treating another hike as inevitable.
"A significant amount of hawkishness seems priced in already, in our view, especially considering the fact that some signs of activity moderation is visible in the US," he added.
For stocks that are sensitive to interest rates, the immediate implications are clear. A softer payrolls number could offer a near-term relief rally for rate-sensitive sectors, including utilities and real estate, which are commonly tracked through ETFs such as XLU and XLRE on the NYSE. That potential relief could occur even if Barclays' base case of further hikes ultimately holds.
Barclays attributes part of the recent hawkish repricing to public comments made by Kevin Warsh at Jackson Hole, which the firm flags as one factor behind the shift in markets' perceived odds for additional Fed tightening.
Energy markets have also intensified the inflation outlook. Oil prices have risen markedly amid a continuing U.S.-Iran standoff through the summer, a development that adds pressure on both the Federal Reserve and the European Central Bank. On the European front, Cau noted that gas prices have moved up to their highest levels since early 2023, though they remain well below the peaks seen during the 2022 Russia-Ukraine energy shock. That environment complicates the ECB's policy calculus.
"ECB too is expected to hike once more this month, but upside risks increase if energy prices stay higher and stagflation concerns rise," Cau wrote. Barclays warns that a stagflation outcome in Europe would weigh on regional equity benchmarks and exacerbate pressure on consumer-facing sectors already experiencing slower growth.
Barclays sees a broader shift in the equity landscape as well. The cushioning effect from a robust second-quarter earnings season has diminished, leaving stocks more vulnerable to shifts in rates and oil price volatility. "Equities have become more sensitive to rates and oil volatility recently, as the Q2 earnings tailwind is behind us and macro is back in the driver's seat," Cau said.
The firm anticipates a potentially volatile autumn, with a calendar that includes central bank policy decisions, geopolitical developments, and high-level diplomatic meetings. Against that backdrop, Barclays recommends a tactically defensive stance.
"Hedging and some tactical moderation in beta exposure appears prudent, even though the outlook remains supportive into year end, contingent on stabilisation in rates and oil," Cau wrote. In practice, that guidance points to trimming exposure to high-beta cyclicals and using hedges to add optionality, rather than wholesale reductions in equity allocations. The firm stops short of calling for a bearish posture into year end.
Key market variables to monitor in the near term therefore include the incoming payrolls report and next week's CPI reading, movements in oil and European gas prices, and central bank communications. These elements together will shape whether the current market consensus on Fed policy tightens further or is forced to adjust.