Soft jobs, hard policy choices

Summary

Last week in markets

Markets opened August with a broad equity advance as improving prospects for diplomacy around the Strait of Hormuz sent oil prices sharply lower and supported rate-sensitive sectors. The S&P 500 Total Return Index gained 3.59% for the week, led by technology and strong corporate earnings. Rates were volatile but finished lower. The 10-year Treasury yield ended the week at 4.65%, approximately 10 basis points below the prior Friday, after softer labor data reduced the urgency for another near-term Federal Reserve rate increase. Together, lower yields and resilient earnings supported longer-duration equities.

Friday’s employment report was the week’s key market event. Nonfarm payrolls fell by 23,000 in July, while May and June payrolls were revised down by a combined 103,000. Unemployment edged down to 4.1%, but labor force participation remained subdued, and annual wage growth cooled to 3.2%. The report supported equities and Treasuries by shifting the policy debate away from immediate tightening, even as inflation remains a concern.

Brent settled at $83.55 a barrel Friday, down 5.0% for the week, after falling to $79.36 Tuesday and rebounding as a Hormuz agreement remained unsigned. The combination of softer labor conditions and volatile energy prices leaves markets particularly sensitive to incoming inflation and employment data.

The week ahead

Wednesday’s July CPI report will be the week’s primary macro catalyst. Consensus expects annual headline inflation to ease modestly to 3.4%, but the underlying components may matter more for markets than the headline figure. A benign core reading would reinforce the case for the Federal Reserve to remain on hold in September and could extend the decline in Treasury yields. A firm print, particularly across shelter and services categories, would revive concerns that goods prices, energy costs and domestic pricing power are keeping inflation too persistent for policymakers to respond to softer hiring.

Thursday’s PPI report will offer another indication of whether pipeline price pressure is moderating, followed Friday by July retail sales. Together, the releases will help clarify the balance between cooling employment and household demand. The Treasury’s $125 billion quarterly refunding, with auctions from Tuesday through Thursday, adds a parallel test of demand for duration at current yields.

Softer inflation and restrained consumption would favor Treasuries but could raise questions about earnings momentum. Resilient retail sales, particularly alongside firm PPI, could push the 10-year yield higher as markets price in a greater chance of additional tightening.

Central bank decisions abroad will offer another perspective on policy divergence. The Reserve Bank of Australia announces its decision Tuesday, followed by Norges Bank Thursday. Their guidance will show whether central banks with inflation targets continue to favor restrictive policy despite softer global growth. The Federal Reserve has no meeting or Board speech scheduled, leaving U.S. policy pricing largely shaped by incoming data.

Geopolitics remains the principal external variable. A finalized U.S. and Iran framework for Hormuz transit could reduce the geopolitical premium in oil prices, while failure to reach an agreement or further Houthi disruption in the Red Sea would put upward pressure on crude prices and inflation expectations.