The U.S. nonfarm payroll report for August showed modest job growth, a slowdown in wage growth, and a relatively sharp jump in the unemployment rate, all clear signs that the U.S. labour market is normalizing. In this context the likelihood of the Federal Reserve raising interest rates in September and possibly in November is diminishing.

Financial markets currently assign a probability of 93% the Federal Reserve would keep rates unchanged at its policy meeting on the 19-20 ^th of September, according to the CME FedWatch tool. Nevertheless, investor expectations for another pause in November are lower at 52%.

Despite more evidence that the tight U.S. labour market is loosening at last, the interest rate futures market remains undecided about whether the Federal Reserve has one more rate hike left in the bag – and still sees 50-50 chance of one more move in November.

Last week’s economic data increasingly gave investors hope that the Federal Reserve could hold interest rates steady this month, following a hike in July that brought rates to their highest level in 22 years. But the Fed hasn’t ruled out additional rate increases, and that could still happen unless inflation slows further.

The Fed has made cooling labour demand a major objective of its tightening cycle, with policymakers hoping that this trend could help slow wage growth and, in turn, alleviate some inflationary pressures.

These recent economic indicators align with the notion that the U.S. economy is approaching a so-called soft landing, reinforcing the belief that the Fed is nearing the conclusion of its interest rate hike cycle.

Source: TradingView

The impressive rally in the U.S. stock market from the onset of the year could be capped in the near term, as stock prices appear to be too high relative to earnings. Recessionary fears for the U.S. economy are rising, with fiscal and consumer spending likely to decline in 2024.

Investors sold off equities in August, triggering a correction of 9%. The rebound over the past two weeks has reversed course as economic data is showing a rise in inflationary pressures, just as investors were gathering confidence the labour market is cooling and seeing a soft landing as a probable scenario. Investors are once again focused on central bank policy, with inflation and interest rate uncertainty, China’s economic slowdown, and geopolitics further clouding the horizon.

Oil prices have hit their highest level in nine months after Saudi Arabia and Russia, announced they would extend output cuts till the end of the year. Elevated energy prices could push up inflation for services and could potentially extend the Fed’s fight against inflation, which in turn would add more pressure on the U.S. economy.

The turbo charged rally has clearly lost momentum since July, with stocks unlikely to continue to run on high octane in the coming months, meaning that the index is likely to enter a phase of consolidation in the near-term. At this juncture in time only a break below 14,558 would confirm the secondary up trend from the October 2022 low has reversed course and trigger lower levels over the medium-term.