Jobs, Inflation Data and Micron Earnings Headline Market Week as Fed Rate Path Is Debated

The Fed raised rates by a quarter-percentage point at its September meeting while inflation remains above its 2% target. Chairman Kevin Warsh said, "There's been a pretty wide-ranging set of data, including in the labor markets, that the economy has strengthened." The August jobs report was much stronger than expected and likely contributed to that decision. Rate hikes are intended to cool inflation by raising borrowing costs and slowing economic activity, but the central bank cannot reopen the Strait of Hormuz or directly force companies to moderate capital investment in new data centers or manufacturing plants. Traders increased bets on additional tightening last week after S&P Global's U.S. manufacturing and services purchasing managers' indexes came in well above expectations. As of Sunday, traders priced a 66% chance of a quarter-point hike at the Fed's late-October meeting and roughly 50-50 odds of another increase in December.

Friday's September nonfarm payrolls report is the week's biggest economic release. It follows the Job Openings and Labor Turnover Survey on Tuesday morning and payroll processor ADP's private hiring report on Wednesday. The JOLTS report covers August and is the least important of the three. ADP data covers September. FactSet consensus calls for 58,000 private-sector jobs additions. Economists polled by FactSet expect nonfarm payrolls to rise by 82,500 in September, with the unemployment rate unchanged at 4.1% from August. A hot jobs report on Friday could increase rate-hike expectations.

Two days before the payrolls report, the Bureau of Economic Analysis will release the August personal consumption expenditures price index, the Fed's preferred inflation gauge. FactSet expects PCE to rise 0.4% month over month and 3.8% year over year. Core PCE, which strips out food and energy, is projected to rise 0.3% monthly and 3.4% annually. Warsh said, "This summer's inflation readings do not tell me that underlying trends have meaningfully improved." The BEA is changing how it tabulates spending on financial services such as portfolio management, computer software and accessories, and legal services, and will issue retroactive data through the first quarter of 2021. RBC Capital Markets economists wrote in a blog post last week that the methodology updates may result in "a one-time shift in measured inflation in the U.S., resulting in a lower-than-expected reading."

Micron's earnings on Wednesday night will test the rebound in AI stocks that began in mid-September after a brief sell-off tied to growing concerns about AI safety risks. Eli Lilly will also draw attention to the next phase of the obesity drug race.