Bad (Great) Data

Bad (Great) Data.

The stage has been set for a 17^th of September FED meeting with a 25bps cut very near the horizon as the latest NFP data and quarterly revision to March 2025 has shown a slow down in labor market dynamics, which is bad news for the economy but great news for the market.

But let’s set the scene from the beginning. Last Friday late afternoon, we saw a set of economic data with NFP numbers coming below expectations (+22k vs +73k) and the unemployment rate ticking up to 4.3%. We also saw a revision of the cumulative NFP for the year of -911k which implies a weaker labor market. Yesterday we saw US CPI numbers as well, which came in line with expectations (2.9% vs 2.9%) a mild increase of 0.2% from the last print which meant a small pass through of higher prices due to tariffs. All in all, though, with a stable inflation rate and a weaker labor market, the 25bps cut for the Fed next week is penciled in as a certain event. What the market is trying to figure out now though is the trajectory of further rates cuts in the US for this year and next year. As it stands today, we are expecting 72bps of cuts by year end which will bring the FED funds rate to 3.75%, with 50bps further cuts by June 2026. (see graph below)

Moving on to market moves, September has been traditionally a weak month in returns. So far, we have seen the opposite effect with US stocks trading 1.5-2.5% higher month to date. European stocks are trading in the range of 0.5-1% higher with the EU bank stock index (SX7E Index) showing a staggering 58.78% increase year to date. Let me remind you, this was one of the first trades we pointed out as potentially good relative value and one which we are holding in our Athlos Balanced Strategy AMC. In terms of alternatives. Gold continues its rising trajectory and at $3650 per ounce, it has provided a way of out-performance in portfolios with 39% increase year to date. EURUSD has traded in a stable format in the 1.16-1.1750 range for the last month with a few schools of thought arguing several outcomes regarding its performance by year end. My feeling given it is one of the most crowded positions right now is that we may see some profit taking post the FED with a “buy the fact sell the news” situation in hand. Further out, I still think it continues its rising trajectory with a psychological level of 1.20 in mind.

In Europe, on Thursday the ECB kept borrowing costs unchanged, deeming inflation pressure contained and economic dangers abating. The deposit rate was left at 2% and policymakers offered no guidance on future steps, stressing that they will act at one meeting at a time based on incoming data. My view here is that the ECB will only move if it sees a further lower trajectory in inflation data or worsening of economic conditions so for now, I believe they are done for this year, ceteris paribus.

In the UK, the economic picture remains oblique as the economy failed to grow in July, according to official statistics, adding to pressure on chancellor Rachel Reeves ahead of the autumn Budget. The Bank of England’s monetary committee will vote on the 18^th of September with market expecting an unchanged rate at 4% but with renewed focus on forward guidance. Also, market participants are expecting a change in QT (quantitative tightening i.e. unwinding their balance sheet by selling government bonds back in the market) which may alleviate some pressures for the long end of the gilt curve.

Looking ahead…

Next week we are expecting another set of important data across both sides of the pond. US retail sales will show if the strength of the consumer is intact along with European CPI data. Obviously, we have the FED meeting on the 17^{th of} September which will define the forward trajectory of the FED funds rate towards year end. Post September, we will move our attention towards corporate earnings again which in my view will consolidate a move higher in risk assets going into year end.

Written by: Michael Konstantinou, Senior Portfolio Manager