While the US economy added more jobs than expected in August with non-farm payrolls coming in at 187,000 compared with 170,000, the markets took comfort from the big downward revisions to June and July which knocked a combined 110,000 from the prior labour market reports.

Stocks and bonds rallied (yields move in the opposite direction to prices) on hopes the Federal Reserve will pause rate rises in September and possibly in November.

With headline inflation moving in the right direction and a softening labour market it appears the ‘Goldilocks’ narrative is back in vogue whereby ‘bad news’ is perceived as ‘good news’.

Investors sense the rate hiking phase is close to its peak which in previous economic cycles gave the central bank room to cut interest rates if needed to stimulate the economy. In theory lower interest rates also imply higher price to earnings ratios for stocks.

One problem with this take on events is that the current economic cycle is quite different to prior cycles and inflation may remain elevated, reducing the potential for rates to fall this time around.

There is an inherent contradiction between what stock and bond markets are saying. Bond markets are discounting falling interest rates in 2024 while equity investors are pricing in a re-acceleration of earnings growth according to Refinitiv data.

In other words, equity markets believe wholeheartedly in a soft landing (no recession) while bond markets are pricing in a recession. Clues to solving the conundrum could be at hand when the Fed reveals an update to its summary of economic projections at its 20 September meeting.

Ahead of this decision point the central bank will have further data points to mull over including a CPI reading on 13 September, PPI (producer price index) on the following day and the University of Michigan sentiment data on 15 September.

At least the US has the positive backdrop of a resilient economy to rely on while it is fighting inflation. By contrast the European and UK economies are showing signs of weakness while inflation remains higher than the US.

Eurozone core consumer price inflation dipped marginally in August to 5.3% compared with last year but headline inflation was unchanged versus the prior month (5.3%) as energy prices increased again.

Markets are pricing in a 25% chance of a quarter percentage point rate hike at the ECB’s next policy meeting on 14 September.

A week later (21 September) the Bank of England meets to decide on interest rates with markets expecting the central bank to continue hiking until early 2024. UK consumer price inflation is running at 6.8%.

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