Labor Market vs. Inflation Risks: What Traders Should WatchCME_MINI:NQ1! CME_MINI:ES1! CME_MINI:MNQ1! CME_MINI:MES1! CBOT_MINI:YM1! CBOT:ZN1! CBOT:ZB1! ECONOMICS:USNFP
The stock market is currently holding near all-time highs. Today, the BLS (Bureau of Labor Statistics) report, which includes the NFP (non-farm payrolls), will be released at 7:30 am CT.
Market participants are closely watching the non-farm payrolls, with the forecast at 75K, as well as any prior revisions to earlier NFP numbers. The unemployment rate is expected at 4.3%, a slight increase of 0.1%.
Looking ahead, upcoming key events include inflation data and the September FOMC rate decision:
• Aug PPI (Sep 10): A gauge of upstream price pressures. Hot numbers would signal renewed inflation risks.
• Aug CPI & Core CPI (Sep 11): Critical headline data. A softer print would support the dovish case.
• Fed Decision (Sep 17): This meeting comes after the Aug NFP data release (Sep 5).
While there is broad optimism and euphoria in the market, we remain cautious based on our analysis of major futures indexes. Traders should be mindful of signals that could point to a pullback.
Our reasoning:
Markets are currently pricing in two 25 bps cuts for the September and October FOMC meetings, which would bring the target rate down to 3.75%–4.00%.
Additionally, markets are now pricing in four 25 bps cuts in 2026. Prior to the Jackson Hole meeting and recent Fed-related developments, expectations were for three cuts in 2025 and two cuts in 2026.
Does this imply that the effective tariff rate is benign? Is inflation expected to fall, or does this suggest that the Fed is willing to tolerate average inflation in the 2.5%–3.0% range?
The upcoming Fed meeting is likely to emphasize risks to the labor market, while downplaying inflation risks, highlighting the tradeoff within the Fed’s dual mandate.
Other considerations:
Seasonal and cyclical flows also suggest that equity indexes tend to underperform in September and October on average.
Risk-Monitoring Framework: Signs of a Pullback
Given the deteriorating macro backdrop, further steepening of the yield curve, persistently high long-end yields, and the heavy concentration of stock market capitalization in the Mag 9 stocks, it is critical to monitor:
1. Rates & Yield Curve
• 2s10s & 5s30s steepening: Excess steepening with long-end yields above 4.5% would tighten financial conditions.
• SOFR futures spreads: Divergence vs. FOMC guidance can signal rate-path misalignment.
2. Labor Market Signals
• NFP revisions: Downward revisions of >50K would reinforce labor weakness.
• Unemployment rate: Sustained above 4.3% could mark a turning point for the Fed’s labor mandate.
3. Inflation Data
• PPI upside surprises: A risk that supply-side shocks re-ignite inflationary pressures.
• CPI/Core CPI stickiness: Core >3.1% YoY would challenge the market’s dovish pricing.
4. Equity Market Internals
• Mag 9 leadership: Watch for relative weakness in NVDA, AAPL, MSFT, AMZN, META, TSLA, GOOG, AVGO, and BRK.A.
• Breadth indicators: Advance/decline line and % of S&P 500 above 200-day MA. Narrowing breadth = fragility.
• Volatility (VIX): A spike above 20 would indicate stress returning to equity risk sentiment.
5. Cross-Asset Indicators
• Credit spreads (IG & HY): Widening signals stress in funding markets.
• USD & Commodities: Rising USD and higher energy prices would tighten global liquidity.
Conclusion
While optimism remains strong, we caution that macro deterioration, yield curve dynamics, and concentrated equity leadership create fragility. Pullback risks rise if:
• NFP disappoints sharply,
• inflation re-accelerates, or
• outperformance in the Mag 9 begins to roll over.
Traders should monitor these risk indicators closely, as they often precede market drawdowns in September–October.
