The start of September is playing an already familiar tune as risk appetite has been poor on most days and volatility increased, while USD and short-term interest rates declined. September is the worst month of the calendar year over the past 25 years for the S&P 500. Underperformance in the tech sector has been linked to sector rotation and earnings disappointments. But rising stock market volatility is also in line with weaker macro momentum and could continue, at least into the FOMC meeting next Wednesday.
It’s another busy week which includes the last US inflation data before the Fed’s policy decision, a major central bank meeting and the first Harris-Trump US presidential TV debate. Most estimates for US August CPI due on Wednesday point to stable price pressures, though upside risks could come from a rebound in core services inflation. Inline prints would mean steady volatility as markets focus more on the employment picture to determine the policy path. Recent Fedspeak and data suggest a 25bps September rate cut, though the market still prices in over 100bps of policy easing across the next three Fed meetings.
The ECB meeting on Thursday will see another 25bps cut, with markets seeing close to a 50% chance of an additional move this year. Weak productivity and labour force growth suggest that the region’s potential GDP will continue to struggle. Wage growth did decline significantly in the second quarter, but the jobless rate remains at record lows and services inflation sticky. Going forward, that means rate setters will likely remain cautious and data dependent.