Thierry Hasse: Jobs report may shape Fed’s interest rate decision

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The trading week prior to the long Labor Day weekend was uneventful, as is often the case in the last days of the traditional summer vacation season.

In fixed income markets, yields were little changed. The focus has turned squarely to the next Federal Reserve open markets committee meeting, scheduled for September 17-18, where the central bank is widely expected to start its long-awaited reduction in interest rates.

In the Treasury market, yields held relatively steady during the trading week as investors were trying to handicap whether the Federal Reserve will cut interest rates by 25 or 50 basis points. The Commerce Department reported on Friday morning that the Personal Consumption Expenditures price index was up 2.5% from a year ago. The core PCE, which excludes the index’s volatile food and energy components, was up 2.7% compared to last year. But both measures are now consistently and steadily declining toward the Fed target of 2%. This reassuring trend in the inflation picture explains why Federal Reserve officials are turning their attention on the other part of their dual mandate: Supporting the labor market.

Even though Treasury yields traded in a very narrow range, it is worth noting the change in the shape of the yield curve. For two-year notes, yield was up 4 basis points to 3.94%. For 10-year notes, yield was up 11 basis points to 3.92%. This steepening of the yield curve is expected. Why? Because the Federal Reserve is about to start cutting short-term rates while the Treasury market is facing endless supply of debt. The Congressional Budget Office projects that annual budget deficits will be more than $1 trillion for the next 10 years.

A Quiet Week for U.S. Stocks

The U.S. stock market was essentially unchanged for the week, until a late push during the final hour of trading on Friday. The late day bump was most likely due to money managers adjusting their equity portfolios at the end of the month.

The high-flying computer chip-maker Nvidia reported exceptional earnings that easily beat Wall Street expectations. Thanks to the boom in spending on artificial intelligence, demand for Nvidia chips remained strong and the company reported that its quarterly revenue rose 122%, to $30.04 billion, compared to last year’s second quarter.

In a case of buying the rumor and selling the news, however, Nvidia’s stock price was down about 7% after the quarterly results were released. However, equity investors were encouraged by the fact that the stock market managed to show some gains despite the negative performance of Nvidia’s stock.

Key Jobs Report Expected Friday

As earnings season winds down, the big event this week will be the all-important release of the U.S. jobs report for August. Will Bureau of Labor Statistics report show that the U.S. economy continued to create jobs at a healthy pace? Or will we see further signs of weakness in the labor market? This single data point may be the determining factor in the magnitude of the Fed’s expected reduction in interest rates.

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