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London Quick Take - 4 Sep - Waller rides to the market's rescue ahead of nonfarm payrolls
Neil Wilson
Investor Content Strategist
Note: This is marketing material. This article is not investment advice, capital is at risk.
Waller to the rescue: stocks and bonds rallied after Fed governor Chris Waller delivered a salve to markets fretting the Fed will hike rates this month by saying he’s leaning towards a hold. His reaction function was pretty clear – hot August CPI print means a hike but continued progress towards 2% means hold. Basically, +0.2% CPI month-on-month means no reason to act but +0.3% justifies an immediate hike. This seems a bit odd.
Here was the important bit of his speech: “Recent data suggest we are finally seeing some signs of disinflation. If this continues in the data due over the next two weeks, I would be inclined to support holding the target for the federal funds rate at its current setting. But there continues to be considerable uncertainty about how military conflicts, trade policy, and artificial intelligence will affect prices and economic activity. If the incoming data for August show this improvement has been fleeting, then it may be appropriate to raise the policy rate when the FOMC meets on September 15 and 16.”
Waller is a senior voice at the Fed and gives a good steer for expectations of what the FOMC might do, but we still don’t really know the Fed chair’s current reaction function. Going by Jackson Hole and now this, it seems Kevin Warsh is still sticking to his tough-talk-not-tough-action approach, while Waller gives a cleaner view of where the Fed stands. This seems to suggest next Friday's CPI data is critical to the market reading of what the Fed does next.
After a tense and at times febrile week for fixed income markets, bond yields are lower following his comments. 10yr Japanese yields are at 2.91% after breaching 3% earlier in the week for the first time in 30 years, while the benchmark 10yr Treasury yield is at 4.76% from a high of 4.821%. Albeit ticking up just a shade this morning the UK 10yr gilt yield sits around 5.08%, down from multi-year highs at 5.234% earlier in the week. Odds of a September rate hike by the Fed have fallen to 50% from 70% earlier this week. The dollar pulled back with yields and gold rallied above $4,500 where it found some resistance after two big days of gains as the bond rout cooled.
The lift to stock markets was immediate as bond yields fell across the curve. A rally in crude prices had dampened risk sentiment but the Waller remarks sent stocks on Wall Street firmly higher, with the S&P 500 rallying +1% for the session, while the Nasdaq added +1.4% and the Dow Jones climbed +1.2%. European equity markets came along for the ride with the FTSE 100 rallying +0.7% and Stoxx 600 +0.5% higher. Equity markets have opened Friday in muted fashion awaiting the nonfarm payrolls.
The rally came despite Brent crude breaking out to a fresh 6-week high on some belligerent remarks from Israel’s defence minister Katz, who warned any attack by Iran would release Iran from any restrictions on striking Tehran. “We would strike all national, military and civilian infrastructure — including energy infrastructure — and return Iran deep into the Stone Age” Earlier oil prices briefly dipped after Russian President Putin said there was a “chance” for peace but stressed that Russia and Ukraine must resolve the conflict themselves. Brent flipped from a low testing $94 to trade at its highest since 24 July to above $97.30, before pulling back to find support at the $95 area once again. The rally means crude is on course for its best week since July. It underlines sketchy market sentiment around the situation in the Middle East and its read across to wider financial markets.
Bank of England officials have been keeping pretty quiet over the recent bond market rout. But Huw Pill, the hawkish chief economists, favours a “prompt” hike. His views are generally on the more hawkish end – to get a better feel for where the MPC is we hear from governor Andrew Bailey, who is due to speak about central banks’ efforts to control inflation at the LSE this morning. It comes amid signs the UK economy is proving resilient (even if the labour market is in a total mess). The latest PMI data for the service sector showed a moderate increase in business activity during August, while new work rose for second month running. No surprise however that input cost inflation accelerated...all hawkish signals as far as the BoE is concerned. However, the upcoming Budget means markets and policymakers will need to wait and see what the fiscal outlook is like and what the Chancellor has in store before making any moves. Markets don’t see a rate hike by the BoE until November. The reason to stay came and carry on – and look through the inflation scares – is the labour market. The PMI data showed another decline in payrolls - service sector workforce levels have now decreased for 23 months, which is the longest continuous period recorded since the survey began in July 1996.
Nonfarm Payrolls are up today – seen around 55k jobs added with the unemployment rate holding steady at 4.1%, which suggests the labour market remains in a low-hire, low-fire mode, which wouldn’t really move the needle for the Fed. Wage pressure could rise to +0.3% month-on-month, which would be a hawkish signal for the Fed. July's nonfarm payrolls showed a drop of -23k jobs and more than -100k in downward revisions, which could be a seasonal factor which could see the 55k headline number a tad on the light side – closer to 100k is possible.
Remember even if it’s another negative print it does not mean the economy is slowing or in trouble. The Fed itself notes that "employment growth in any given month is almost as likely to be negative as it is to be positive. Furthermore, these negative prints of job growth could be large in any given month [...] it would not be unusual for there to be one or more months in 2026 with declines in total payroll employment as large as -100,000 jobs, even if economic output was growing at the rate of potential output growth.”
Here was the important bit of his speech: “Recent data suggest we are finally seeing some signs of disinflation. If this continues in the data due over the next two weeks, I would be inclined to support holding the target for the federal funds rate at its current setting. But there continues to be considerable uncertainty about how military conflicts, trade policy, and artificial intelligence will affect prices and economic activity. If the incoming data for August show this improvement has been fleeting, then it may be appropriate to raise the policy rate when the FOMC meets on September 15 and 16.”
Waller is a senior voice at the Fed and gives a good steer for expectations of what the FOMC might do, but we still don’t really know the Fed chair’s current reaction function. Going by Jackson Hole and now this, it seems Kevin Warsh is still sticking to his tough-talk-not-tough-action approach, while Waller gives a cleaner view of where the Fed stands. This seems to suggest next Friday's CPI data is critical to the market reading of what the Fed does next.
After a tense and at times febrile week for fixed income markets, bond yields are lower following his comments. 10yr Japanese yields are at 2.91% after breaching 3% earlier in the week for the first time in 30 years, while the benchmark 10yr Treasury yield is at 4.76% from a high of 4.821%. Albeit ticking up just a shade this morning the UK 10yr gilt yield sits around 5.08%, down from multi-year highs at 5.234% earlier in the week. Odds of a September rate hike by the Fed have fallen to 50% from 70% earlier this week. The dollar pulled back with yields and gold rallied above $4,500 where it found some resistance after two big days of gains as the bond rout cooled.
The lift to stock markets was immediate as bond yields fell across the curve. A rally in crude prices had dampened risk sentiment but the Waller remarks sent stocks on Wall Street firmly higher, with the S&P 500 rallying +1% for the session, while the Nasdaq added +1.4% and the Dow Jones climbed +1.2%. European equity markets came along for the ride with the FTSE 100 rallying +0.7% and Stoxx 600 +0.5% higher. Equity markets have opened Friday in muted fashion awaiting the nonfarm payrolls.
The rally came despite Brent crude breaking out to a fresh 6-week high on some belligerent remarks from Israel’s defence minister Katz, who warned any attack by Iran would release Iran from any restrictions on striking Tehran. “We would strike all national, military and civilian infrastructure — including energy infrastructure — and return Iran deep into the Stone Age” Earlier oil prices briefly dipped after Russian President Putin said there was a “chance” for peace but stressed that Russia and Ukraine must resolve the conflict themselves. Brent flipped from a low testing $94 to trade at its highest since 24 July to above $97.30, before pulling back to find support at the $95 area once again. The rally means crude is on course for its best week since July. It underlines sketchy market sentiment around the situation in the Middle East and its read across to wider financial markets.
Bank of England officials have been keeping pretty quiet over the recent bond market rout. But Huw Pill, the hawkish chief economists, favours a “prompt” hike. His views are generally on the more hawkish end – to get a better feel for where the MPC is we hear from governor Andrew Bailey, who is due to speak about central banks’ efforts to control inflation at the LSE this morning. It comes amid signs the UK economy is proving resilient (even if the labour market is in a total mess). The latest PMI data for the service sector showed a moderate increase in business activity during August, while new work rose for second month running. No surprise however that input cost inflation accelerated...all hawkish signals as far as the BoE is concerned. However, the upcoming Budget means markets and policymakers will need to wait and see what the fiscal outlook is like and what the Chancellor has in store before making any moves. Markets don’t see a rate hike by the BoE until November. The reason to stay came and carry on – and look through the inflation scares – is the labour market. The PMI data showed another decline in payrolls - service sector workforce levels have now decreased for 23 months, which is the longest continuous period recorded since the survey began in July 1996.
Nonfarm Payrolls are up today – seen around 55k jobs added with the unemployment rate holding steady at 4.1%, which suggests the labour market remains in a low-hire, low-fire mode, which wouldn’t really move the needle for the Fed. Wage pressure could rise to +0.3% month-on-month, which would be a hawkish signal for the Fed. July's nonfarm payrolls showed a drop of -23k jobs and more than -100k in downward revisions, which could be a seasonal factor which could see the 55k headline number a tad on the light side – closer to 100k is possible.
Remember even if it’s another negative print it does not mean the economy is slowing or in trouble. The Fed itself notes that "employment growth in any given month is almost as likely to be negative as it is to be positive. Furthermore, these negative prints of job growth could be large in any given month [...] it would not be unusual for there to be one or more months in 2026 with declines in total payroll employment as large as -100,000 jobs, even if economic output was growing at the rate of potential output growth.”
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