Weekly Spotlight: Jobs Report Poised to Steer Central Banks in September

Markets remained in a holding pattern as they awaited crucial data releases ahead of September’s central bank meetings. Equity markets showed mixed performance, with European indices outpacing their U.S. counterparts following Nvidia’s somewhat underwhelming earnings report. Bond yields were relatively stable, while the post-Jackson Hole rally in EUR/USD lost momentum, slipping below 1.11. Oil prices saw a modest increase, nearing USD 80/bbl, driven by ongoing supply concerns in Libya.

Preliminary data for the euro area in August revealed headline inflation easing to 2.2% year-over-year, marking the slowest rate in three years. However, this drop was primarily due to a negative base effect in energy prices, as core inflation remained nearly steady at 2.84% year-over-year, compared to 2.85% in July.

In the US, the Conference Board’s August consumer sentiment survey showed strong headline results, but the underlying details were less encouraging. Consumers grew more optimistic about both current economic conditions (134.4, up from 133.1) and the future outlook (82.5, up from 81.1). However, concerns about employment prospects persisted, with the ‘Jobs Plentiful’ index dropping to its lowest level since March 2021. August labor market data has sent mixed signals so far, with weakening consumer sentiment and PMI employment indices, even as jobless claims have trended lower after July’s distortions.

The key data release next week will be the US August Jobs Report on Friday. We expect a modest recovery in nonfarm payrolls growth to +170k (up from +114k in July), with the unemployment rate holding steady at 4.3% and average hourly earnings growth remaining at +0.2% month-over-month (seasonally adjusted). Currently, markets are pricing in a 35% chance of the Fed beginning its easing cycle with a 50-basis point cut, but if the report aligns with our forecasts, market expectations are likely to shift towards a 25-basis point.

In the lead-up to Friday, the US economic calendar features several important releases, including the August ISM manufacturing and services indices and the July JOLTs data. The job openings reported in the JOLTs data are a crucial indicator of labor demand for the Federal Open Market Committee (FOMC).

Labor markets in the euro area are also under scrutiny. The ECB’s key wage growth metric, Q2 Compensation per Employee data, is set for release on Friday. ECB staff projections from June anticipated wage growth to rise to 5.1% year-on-year in Q2, up from 5.0% in Q1. However, the negotiated wages indicator (Q2 +3.6% y/y; Q1 +4.7%) suggests potential downside risks. Markets have already priced in a 25bp cut by the ECB at the September meeting, consistent with our outlook.

Attention is now shifting to the final meetings of 2024, where we anticipate an additional cut in December. Markets are pricing in a cumulative 37bp reduction for the last two meetings of the year, indicating a 50% probability of the next move happening as early as October.

Key data releases are also expected from China. The official NBS PMIs are set to be released on Saturday, followed by the private Caixin manufacturing PMI on Monday. Both manufacturing indices have slipped below the neutral level of 50 during the summer, and they are likely to remain there, highlighting ongoing growth challenges in China.