A week ago, there was still a chance that the Fed would keep rates unchanged at its September 17 meeting. The probability was not high, perhaps 10% at best, but it existed. Since Friday, however, that chance has been reduced to zero, shifting the debate to whether the Fed will cut 25 basis points or go straight to 50, for the sake of the S&P 500.

What triggered this change in market expectations was weak labor market data. Instead of the 75,000 jobs expected in August, only 22,000 were created, down from 79,000 in July. As for unemployment, it rose from 4.2% to 4.3%, which is in line with expectations. All in all, the situation is clearly deteriorating.

To make matters worse, June’s figures were revised downward for the second time. Initially, the figure was reduced from 147,000 to 14,000, but now it has been revised again to -13,000, marking the first monthly job loss since the pandemic. How such a drastic revision came about remains a mystery.

This puts the Fed in a difficult position. Powell has been talking up the economy, but reality is undermining his message. Like it or not, the Fed has to act if it wants to stop the bleeding. The thing is, the worsening labor data may have been caused mainly by trade wars, something that lowering interest rates won’t fix.

Ok, the Fed will cut rates in September. But by how much?

The answer could depend on inflation data due out this week. If core CPI falls to around 3%, or even closer to 2%, the odds of a 50 basis point cut could rise significantly. Conversely, if core CPI surprises on the upside, the Fed could opt for a more moderate move, dampening investors’ bullish momentum.

And the latter scenario seems more likely. Consensus forecasts point to a 0.3% monthly increase in the US core CPI, which would keep the annual rate at 3.1%, mainly due to Trump’s tariffs. In that case, the dollar index could strengthen slightly, while Treasury yields could rise slightly, and the S&P 500 could experience a correction.

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This content is for informational purposes only and does not constitute financial, investment, or other professional advice. It should not be considered a recommendation to buy or sell any securities or financial instruments. All investments involve risk, including the potential loss of principal. Past performance is not indicative of future results. You should conduct your own research and consult with a qualified financial advisor before making any investment decisions.
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