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Global market sentiment generally ended on a bullish note last week, but much of the upside progress was given up on the eve of the weekend. On Wall Street, Nasdaq 100, S&P 500 and Dow Jones futures gained 0.54%, 1.36% and 1.86% respectively. But, at one point, the tech-heavy Nasdaq rose nearly 6% before evaporating most of its advance.
The sharp reversal came on Friday in the wake of September’s U.S. nonfarm payrolls report. Not only did the country create more jobs than expected at 288,000, but the unemployment rate fell sharply to 3.5% from 3.7%. Admittedly, the labor force participation rate fell to 62.3% from 62.4% previously. All things considered, this indicated a still tight labor market.
This is not good news for the Federal Reserve, which is trying to bring down the highest inflation in 40 years. At the start of last week, markets were starting to price in even a rate hike in 2023. By late Friday, it was back on the table. The central bank’s balance sheet also continued to shrink, hitting its lowest level since December 2021.
Moving away from equity markets, WTI crude oil prices jumped 16.44% in the best week since Russia invaded Ukraine. OPEC+ has announced production cuts in the coming months to try to support prices that have been falling since May. Gold prices also ended higher for the week, but like stocks, most of the gains were pared ahead of the weekend.
Given the US labor market, all eyes are now on this week’s inflation report. Headline inflation is expected to fall to 8.1% year-on-year in September from 8.3% previously. Unfortunately for the Fed, the base gauge is expected to be at 6.5%, down from 6.3%. This latter issue is more pressing for the central bank, as prices are likely to continue to un-anchor from the long-term objective.
Another strong CPI report would likely continue to bring volatility to financial markets, pushing the US Dollar higher. This would also likely push Japan to continue to intervene in the markets to contain USD/JPY. For the British pound, the UK will release employment data. China also releases its CPI report. Earnings season begins with bank reports. What else is in store for financial markets over the coming week?
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