Tech rally rolls on, Oil nears US$100 and markets eye US CPI

Preview: Asian bourses catch a bid, while oil prices eye US$100, with all eyes now turning to the ECB decision and US CPI.

The week that was: Solid US jobs report

Friday’s US payrolls data showed the US economy adding an eye-popping 162,000 jobs in August, up from July’s revised reading of +21,000, beating all estimates (LSEG). Unemployment also remained at 4.1%, while the labour force participation rate jumped to 61.6% from 61.4% – indicating that the influx of new job seekers was largely absorbed by employers. Taken together, this triggered a flattening of the yield curve and underpinned the USD. These data pushed rate expectations for September’s meeting back to a coin toss, erasing any dovish pricing seen after Fed Governor Christopher Waller’s recent comments on rates and inflation; year-end pricing implies 35 bps of tightening.

Meanwhile, Canada’s economy told a rather different story, shedding a little more than 40,000 jobs, with the bulk of the damage coming from full-time employment. Given this, and knowing the ECB is gearing up for a rate hike this week – with the majority of officials echoing a hawkish stance – EUR/CAD longs did well, with an opportunity to enter both in the immediate aftermath of the release and from a break/retest of resistance-turned-support on the M5 chart. 

Market scoreboard this morning

Regional indices in Asia kicked off the week strongly, with South Korea’s KOSPI up 4% – SK Hynix and Samsung the standout gainers – and Japan’s Nikkei 225 up 2%. The catalyst appears to be growing excitement about OpenAI's next-generation model, which traders believe will translate into stronger demand for AI infrastructure and, by extension, the chipmakers that supply it. European and US equity index futures are pointing higher as of writing, though Wall Street is closed in observance of Labor Day.

Developments over the weekend included ongoing strikes between the US and Iran, with US forces launching attacks on three Iranian tankers. Iran has also struck US-linked vessels and threatened a new restricted zone outside the Strait of Hormuz. Oil prices are therefore higher this morning, with both Brent and WTI fast approaching the widely watched US$100/barrel threshold.

FX is relatively muted ahead of the London session; USD/JPY remains an interesting pair to watch, with technical daily support in play at ¥155.54.

Week ahead: ECB rate decision and US inflation take centre stage

The first half of the week will be a snoozer for economic data.

The ECB rate decision will be the first key event this week, on Thursday, and is expected to raise its key benchmark rates by 25 bps. This would mark the second rate increase this year, with some desks pricing in a possible third hike at December’s meeting. I think it is safe to say that a rate increase is all but baked in, with some officials openly supporting policy tightening in recent weeks. The question is whether the central bank signals another down the road. I would be surprised if President Lagarde offers us much guidance to work with; I think it will be a case of extracting the next policy signal from the revised projections.

The marquee event this week will be Friday’s August CPI inflation report, especially as market pricing has now returned to 50/50 for next week’s FOMC decision, largely triggered by last week’s solid labour report. In the lead-up to the CPI release, key Fed officials have also emphasised the importance of inflation.

These include Chairman Kevin Warsh, who set the tone by saying inflation trends have not ‘meaningfully improved’ and emphasising that the central bank still has work to do. We also had Governor Warsh hit the wires last week, saying he would be comfortable holding the target rate if inflation continues to cool, pointing to this week’s CPI print as a key input to his decision-making (though I want to add that he was careful with his framing, as he wants to see a disinflation trend across the board, rather than letting one release decide).