Markets Reflect Changing Rate Outlook as Economy Outperforms
Market expectations for interest rates have shifted with investors taking stock of a strengthening US economic outlook.
The August jobs report will arrive on Friday with the Federal Reserve’s inflation fight entering its next round, as policymakers look for signs that wage and price pressures are on a sustainable downward course. The central bank faces the difficult task of wrangling inflation while US growth outperforms expectations. Economic resilience provided a note of both optimism and caution to the Jackson Hole summit last week. In what was viewed as a hawkish message on rates, Fed Chair Jay Powell said officials would “proceed carefully” but warned of further tightening if the economy overheats and threatens to unwind recent progress on inflation.
The monthly jobs survey will offer fresh clues on the state of the economy. Forecasts indicate that employment grew by 170,000 jobs in August, compared with 187,000 the month before. A separate Labor Department report on Tuesday showed that job openings in July slumped below 9 million for the first time since March 2021. Meanwhile, the Fed’s favorite inflation gauge, the core personal consumption expenditures (PCE) price index, was up 4.2% year-over-year, higher than June’s 4.1%, according to the latest release on Thursday. In a new analysis from PGIM Fixed Income, Chief Investment Strategist Robert Tipp writes that higher yields should fuel a continuation of the bull market that began in the fourth quarter of 2022—one driven not by a rapid drop in yields, but simply by yield itself.