US Jobs, German Inflation, Chinese PMI: Macro Week Ahead

U.S. labor market data headlines a busy calendar warning of “higher for longer” U.S. interest rates amid growing global recession risk

• Price action across financial markets warns of higher rates, global recession risk.
• U.S. labor market data in the spotlight as the odds for another Fed rate hike grow.
• Chinese PMI and German CPI reports likely to show a worrying growth trajectory.

A worrying narrative seems to be taking hold of the financial markets. Traders are coming around to the conclusion that the global economy is sliding toward recession and the Federal Reserve has little appetite to do anything about it, at least in the near term.

Price action across benchmark assets last week appears telling.

Two-year Treasury note futures fell for a third week straight, touching a 23-year low. Meanwhile, 30-year bonds posted a modest rise. Appropriately enough, three-month to two-year yield spread at the front of the yield curve steepened while the “belly”–the two- to five-year spread—and the long end—the five- to ten-year spread—traded into deeper inversion.

At the same time, gold prices posted the largest rise in nearly two months while the U.S. dollar traded higher against its major counterparts, marking the sixth consecutive week of gains. Stocks managed a modest rise but shed most of their intra-week rise as optimism after another rosy earnings report from Nvidia (NVDA) quickly fizzled.

Taken together, this implies the markets are positioning for higher interest rates in the near term as the U.S. central bank remains focused on quashing inflation. That threatens to knock down the last line of defense against recession, underpinning assets benefiting from liquidation and reflecting bets on stimulus further into the future.

Here are the key macro waypoints shaping the story in the week ahead:

JOLTs U.S. job openings

US job openings are expected to decline for a third month straight. At 9.5 million, they are penciled in at the lowest level since April 2021 but still well above the pre-pandemic average of about 7 million. An outcome pointing to persisting imbalance between labor supply and demand may reinforce bets on a “higher for longer” Fed interest rate path. The odds of another rate hike in 2023 have increased to 65% from just 38% at the start of August.

German consumer price index (CPI) inflation

The largest economy in the Euro area is expected to see headline inflation slow to 6% in August, the lowest since March 2022. A soft result may continue to work against the odds of another interest rate hike from the European Central Bank (ECB). The priced-in probability of a 25-basis-point increase before year-end has fallen to 74% from 85% a week ago. More of the same may amplify pressure on the euro, which now trades near a ten-week low.

Chinese purchasing manager index (PMI) surveys

Of the main drivers of global growth, the Eurozone seems to be in contraction mode already and China has failed to get back on its feet since emerging from “zero COVID” lockdowns in December. A woeful set of PMI figures made the case for the former last week. Now, Beijing’s version of analog numbers for the latter threatens to darken the outlook further. The manufacturing sector is expected to contract for a fifth consecutive month while service-sector activity growth slows to the weakest in eight months.

U.S. PCE inflation

The July edition of the Fed’s favored inflation gauge is seen echoing consumer price index (CPI) numbers published earlier this month. They showed disinflation stalling, and PCE is expected to follow suit. The service sector continues to be the culprit. Housing remains the largest contributor to price growth, where Chair Powell and company have relatively little agency to create change. This is likely to keep the spotlight on the labor market, meaning Fed hawks are likely to remain in control until resilience there gives way.

U.S. employment report

Following on from the PCE report and its implications, August’s employment report is expected to bring the slowest job creation since December 2020. Nevertheless, the unemployment rate is seen holding just a hair above historical low at 3.5%. Absent an improbably sharp downside deviation from consensus forecasts, the numbers seem unlikely to shake the Fed’s resolve and keep officials’ focus on fighting inflation.

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