European equities hold in green while S&P 500 futures consolidate near the June high (4200 points) ahead of a possible breakout, as the strong labor market report on Friday reduced uncertainty in growth forecasts of the US economy with optimism over US growth propagating to other key economies. Despite half a million new jobs in the US in July (+250K forecast), US firms struggle to regain their bargaining power and keep raising wages at a solid pace (+0.5% in July against 0.3% forecast), which means that demand continues to significantly exceed labor supply and the US labor market still has the potential to beat growth estimates in the coming months. In addition, the greater the rise in wages, the more likely firms will pass costs into prices and consumers will increase demand, which means, based on the details of the report, inflation pressure on the US economy is set to remain high.

Following the release of the report, the probability of a rate hike by 75 bp in September increased sharply. According to interest rate futures, it has risen from 29% to 66.5% in a week:

There is also a positive nod from the Fed, for example, at least two of the heads of FRBs hinted that the 75 bp option deserves consideration in September. Several Fed talking heads, like Mester, Bowman and Daly tried to divert market speculations from the idea that the trend of US inflation has finally reversed, stating that there are still a few “concrete” and “unambiguous” signs of an inflation U-turn. This suggests that a 75 bp rate hike in September is on the table and expectations for this outcome will affect market pricing.

Escalating tensions around Taiwan is of little concern to equity markets so far, despite China's military exercises in the island's waters and US reaction to it. Nevertheless, this factor of uncertainty will likely remain on the market’s radar and somewhat curb equity optimism, as well as support gold prices, a classic asset that rallies under such circumstances, near $1,800 per troy ounce.

The NFP report provided increased attention to the US inflation data for July. The CPI report is due out on Wednesday and is expected to show that the YoY headline inflation slowed from +9.1% to 8.7%, while core inflation accelerated from 5.9% to 6.1%. A decrease in headline inflation is expected primarily due to gasoline prices, which fell in July to the level of early May:

In case of a welcomed downside surprise in CPI on Wednesday, the chances of a 75 bp case in September will likely plunge and that should trigger the unwinding of some dollar long positions and a rally of risk assets beyond current resistance levels.

On Thursday, the report on US producer prices is due, which are the leading indicator for consumer inflation, and on Friday the index of consumer sentiment from U. Michigan and consumer inflation expectations, which are very likely to slow further on the back of the drop of gasoline prices. The 75bp Fed rate hike case, with reports coming out that will affect the chances of this outcome, is likely to be the main driver in dollar pricing this week.