Laura Cooper, global investment strategist at Nuveen, discusses the outlook for US economic data and the potential impact on Federal Reserve policy. The major market catalysts begin to hit on Friday with the monthly jobs report.

Washington

Market participants have priced in several US Federal Reserve interest rate cuts, with about five reductions anticipated by the July meeting. However, analysts caution that this optimism may be premature, as inflation uncertainty and mixed economic data continue to cloud the outlook. Recent surprises in core inflation and the potential for re-accelerating services inflation or wage growth could challenge expectations for aggressive easing.

Attention is focused on upcoming labor market data, including payrolls and unemployment rates, which could influence the timing and scale of rate cuts. Revisions to previous job reports and the reliability of alternative employment indicators such as the ADP print are also under scrutiny, as they may provide clearer guidance for markets and policymakers.

Are bets on Fed interest-rate cuts overdone?

Is that too much complacency out there, do you think? I certainly think that is the case. I mean, looking at hedge funds kind of betting on, shorting the VIX the most that we've seen in three years really does suggest that they expect this calm to persist. I think we expect greater volatility if we do see some of this economic data materially surprised to the upside or the downside, just given that equities have really been predicated on the Fed easing coming through quite materially. We have about five rate cuts priced in by the July meeting. And this is occurring against a backdrop where the inflation uncertainty still remains kind of unknown. Because if we think about, yes, we're starting to see goods inflation that's expected to grind higher over the coming months. But last month, the super core inflation measure is actually what surprised to the upside. If we start to see signs of services inflation re-accelerating or wages accelerating, I think that could put some cold water on some of these expectations for Fed market easing bets. Yes, and so let's think about where we might be by Friday or what Friday's payrolls report might tell us, Laura. Because do you think this is going to have a real bearing on September rate cut expectations? Or is it going to be more about the medium term? Because after we heard from Jerome Powell at Jackson Hole, we increased expectations of a Fed rate cut in September. And the market is probably quite attached to those expectations because of what we heard from the chairman. So is it that that's going to be the focus for markets? Or is it going to be all those other rate cuts that the market is priced in? I think it's going to be a combination of both. And I think to your point around will the payrolls really be the determining factor for the September 17 Fed cut, I think it depends on the magnitude of the miss or the beat that comes through. I think last month's payrolls told us that the labor market is on much more precarious footing, given the significant downward revisions. So if we do see a meaningful upside surprise, perhaps then that will start to question whether the Fed will be in a position to cut beyond that September rate cut, which markets pricing in about 88%. Because the Fed doesn't want to necessarily cut into still hot economy. There's certainly implications on the back of that. But if we do see a material miss to the downside, perhaps then we're going to see not just a 25 basis point cut priced in for September, but perhaps that 50-25 debate will come back to the focus. Because if we look when they last surprised with 50 basis points, what precluded that, what preceded that, was really three consecutive months of weak payrolls print. So as well as the payrolls print, I think it's a number of the key labor market indicators as well this week to watch for that could guide that September cut and further out. Because there is this greater scrutiny, certainly on that payrolls data more recently. Yes. So are you expecting, given the way that payrolls reports have gone recently, are you expecting this one to be another one that disappoints? We've seen over the past couple of months it was the revisions and the fact that we thought we had jobs that then turned out not to be there. That was the thing that sort of disappointed and spooked markets. Well, our expectation is that we're fairly in line with consensus that we could see 100,000 job gains in August. But we'll be watching for the more stable metric around the unemployment rate. Right now, 4.2%. If it were to go to 4.4%, I think in this backdrop where there's supply constraints coming through from immigration restrictions, the Fed is really closely monitoring this key gauge. And I think that could really be what to watch for to guide markets. But as well, look to the ADP print this week. That's probably going to have disproportionate importance given the scrutiny on the BLS data. And if we look at, given the revisions, the ADP print has actually been a more accurate gauge than historically it has been. So maybe market attention will turn there.

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