The bulk of economic data released over the last week suggests risk of upward pressure on inflation, increasing the odds that the Federal Reserve keeps rates higher for longer.
The ISM PMIs for manufacturing and services both showed signs of increased inflation pressures. Not only did the prices subindices rise for both sectors, but also their employment subindices each increased four percentage points (charts below, blue lines), signaling continued labor market strength, which could help keep wage growth higher than the Fed wants.
Markets also reacted negatively to Friday’s jobs data, even though the results were mixed. The economy added 187,000 jobs in August – more than consensus forecasts for 170,000 jobs gained – indicating continued labor market tightness.
However, wage growth slowed to 0.2% from 0.4% and the unemployment rate rose to 3.8% from 3.5%, with more people entering the labor force than were hired, indicating improving labor supply.
Energy prices also got a boost this week, with Saudi Arabia and Russia extending the oil production cuts they put in place this summer through the end of the year, reducing production by 1.3 million barrels per day.
This move pushed Brent oil prices above $90 per barrel for the first time this year, and they’re now up 25% since late June (chart below). For much of the past year, falling energy prices were a key driver of disinflation, but that’s started to reverse in the last couple of months.
With recent data signaling increased inflation pressures, markets pushed back expectations for the first Fed rate cut from next spring to next summer and trimmed expectations for cuts by the end of next year from 125 basis points to 100 basis points.
As a result, markets are lower over the last week, with the major equity indices down 1%-2% (chart below, blue line) and 10-year Treasury yields up about 20 basis points to 4.25% (green line).
