After Weak Jobs Report, Investors Shift Their Attention to Inflation

A weak employment report on Friday cemented the likelihood that the Fed will cut interest rates by a quarter-point at its next meeting on September 17. It also increased the likelihood of subsequent rate cuts and raised the odds of a half-point cut to about 10%.

Since Fed Chair Jerome Powell's speech at Jackson Hole, a little over two weeks ago, the focus has shifted to employment and away from inflation. Powell indicated that while inflation is still a significant concern, the Fed was concerned enough about slowing jobs to make that a priority.

Later this week, CPI and PPI inflation reports will be issued, but the market is already confident that the Fed will cut rates next week. These reports will influence the pace of further cuts, but unless there is something wildly dramatic, the quarter-point cut is fully baked into the cake at this point.

Also this week, the Bureau of Labor Statistics will publish revisions to older jobs reports. It is expected that there will be major downside revisions that will further confirm that the employment market is under pressure.

The S&P 500 hit a new high on Friday due to the increased belief that the Fed will complete a dovish pivot based on the weak jobs news. The question for investors is at what point the market has fully discounted the lower rates.

So far, the primary economic concern regarding jobs is their potential impact on Fed policy, but there has been far less concern about how it may reflect on the health of the overall economy. If jobs are weakening, then that will likely impact consumer spending and slow overall growth. However, many economists believe that lower rates will quickly increase business investment and home sales and offset the issues in the jobs market.

While the major indexes are likely to see choppy action as they grapple with unemployment and inflation, there is intriguing action under the surface of the market that is attracting traders. The Russell 2000 IWM is outperforming, jumping over one percent on Friday. While the Magnificent Seven MAGS remains a focus of the mainstream business media, there is growing interest in secondary stocks. Traders are seeking opportunities beyond the expensive and extended big-cap technology names.

My best advice right now is to stay focused on the price action in individual stocks that you own and not to worry too much about the media's obsession with the indexes. The indexes are likely to be volatile, but as long as there is an appetite for good chart setups, then there will be opportunities for traders.

At the time of publication, Rev Shark had no positions in any securities mentioned.