S&P 500, Dow Jones, Nasdaq Directional Fate Tied to CPI After NFP Selloff

S&P 500, Dow Jones, Nasdaq-100 Fundamental Forecast: Neutral

• Major US stock indexes cratered on Friday after the non-farm payrolls jobs report
• Rate traders see a near-100% chance that the FOMC will hike 75-bps next month
• The upcoming US CPI will dictate direction for the S&P 500, Dow Jones and Nasdaq

An in-line US jobs report sent major indexes sharply lower after the print hardened chances for a 75-basis point rate hike to near 100%, according to Fed funds futures and overnight index swaps (OIS). Before the NFP, fed funds futures priced an 87.8% chance for a 75-bps hike at the November 02 FOMC. Those odds increased to 96% after the report crossed the wires.

Treasury rates rose along the curve, with the policy-sensitive 2-year yield rising around eight basis points throughout the New York trading session. The subdued appetite for government bonds is causing concern for some, given that rates are at multi-year highs, which traditionally attracts investment into the “nearly-risk-free” instruments.

The US bond market is closed on Monday for a holiday, which may induce higher market volatility. Later next week, there is around $90 billion in Treasuries in the auction schedule, with 3-year, 10-year and 30-year bond sales scheduled. These auctions may prove insightful for debt appetite, although it’s expected to be weak. That could see yields rise even higher and pressure equities further.

However, it is the United States consumer price index (CPI) that offers the highest profile market event for not only equity traders but the global financial system. All eyes are on Federal Reserve Chair Jerome Powell and what he and his lieutenants plan to do going forward. Analysts see core inflation—a measure that excludes food and energy—rising to 6.5% from a year before. The CPI inflation data is simple to interpret here: a higher-than-expected print and the market likely sell off further, as that would bolster the Fed’s inflation-fighting attitude, while a soft print would likely have the opposite effect.

— Written by Thomas Westwater, Analyst for DailyFX.com

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