Making sense of the forces driving global markets

By Jamie McGeever, Reuters Open Interest Markets Columnist 

Wall Street took a breather on Thursday but not before another tech whoosh had lifted the S&P 500 and Nasdaq to new highs, while the dollar and bond yields ended little changed, as investors trimmed positions ahead of Friday's U.S. jobs data.

More on all that below. In my column today I analyze Fed Chair Jerome Powell's press conference, and the message that came across loud and clear - as long as the unemployment rate stays low, it will be very hard to justify rate cuts. 

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It's easy to forget in the midst of the bullish frenzy, but asset price booms do end, either over time, or more suddenly and painfully. Predicting the catalyst can be difficult, getting the timing right is akin to a lottery.

Right now, the rally in U.S. Big Tech looks unstoppable. Inflation, a hawkish Fed, rising bond yields, tariffs, AI overspend worries? They've all been thrown at the sector but it has powered ahead, lifting the S&P 500 and Nasdaq to record high after record high in recent weeks.

Meta and Microsoft did the heavy lifting on Thursday, with Microsoft joining Nvidia in the rarified air of the $4 trillion market cap club. Both Meta and Microsoft's after-hours earnings reports on Wednesday show their AI bets are paying off.

The global equity picture was much gloomier, however, as Federal Reserve Chair Jerome Powell's hawkish signals on Wednesday and U.S. inflation data on Thursday pushed most major indices into the red.

On the macro front, annual U.S. core PCE inflation was 2.8% and the Dallas Fed's trimmed mean PCE rate shot up to 3.4%, the highest since February last year.

There are signs the tariff effect on goods prices is kicking in. Ernie Tedeschi at the Budget Lab at Yale posted on X that PCE durable goods prices are up 1.7% this year. Excluding the pandemic, that's the biggest 6-month rise since 1987. 

On tariffs, U.S. President Donald Trump on Thursday gave Mexico a 90-day reprieve to negotiate a broader trade deal, but is later expected to slap new levies on countries that have not struck trade deals by his 12:01 a.m. EDT (0401 GMT) deadline.

As economist Phil Suttle points out, the so-called 'BRICS' countries have stood up to Trump more than developed economies, who have "generally preferred to sue for peace." But they're paying a price - as things stand, China and Brazil are facing tariffs of up to 50%; South Africa 30%; and India 25%. "This is a case of a world turned upside down, and not one that improves the global outlook," Suttle says.

The focus now turns to July's U.S. employment data on Friday. Solid job growth and, more importantly, a low unemployment rate, could snuff out all bets on a September rate cut. Right now, market pricing shows a September cut is basically a coin toss.

Federal Reserve Chair Jerome Powell made it clear on Wednesday that the resilient U.S. labor market is currently the primary determinant of monetary policy, a signal that strong July employment figures could snuff out all bets for a September rate cut and reduce the likelihood of any further easing this year.    

At his press conference following the Federal Open Market Committee's meeting on Wednesday, Powell insisted that the rate-setting body's next move will depend on the "totality" of incoming economic data. He acknowledged the case for easing, like the softening in consumer spending, GDP growth of only 1.2% in the first half of the year, and downside risks to the job market from weakening labor demand and supply.

But he signaled why the Fed is maintaining its mildly restrictive stance: "The main number you have to look at right now is the unemployment rate," Powell told reporters.

He has a point. The labor market is still broadly in balance, thanks to tighter immigration controls capping the inflow of foreigners into the workforce. Other indicators like job quits and openings rates are holding up well too. Plus, an unemployment rate of only 4.1% is hardly justification for a rate cut.

The initial market reaction – a retreat on Wall Street, rise in bond yields, surge in the dollar and further cooling of rate cut bets in money markets – suggests investors heard Powell's message loud and clear.