Making sense of the forces driving global markets

By Jamie McGeever, Reuters Open Interest Markets Columnist 

Equities, the dollar, commodities and bond yields mostly rose on Tuesday, but the moves lacked momentum and conviction as investors digested record downward revisions to U.S. job growth figures and looked ahead to U.S. inflation data later in the week.

In my column today I look at next week's Fed meeting. If the Fed cuts rates, expected, it will be doing so with inflation around 3%, notably above its 2% target. Lowering rates and indicating there's more to come could be a signal 3% is the new 2%.  

I’d love to hear from you, so please reach out to me with comments at jamie.mcgeever@thomsonreuters.com. You can also follow me at @ReutersJamie and @reutersjamie.bsky.social. 

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* Revisions or revisionism?

The number of new U.S. jobs created in the year through March was almost a million lower than originally estimated, Bureau of Labor Statistics annual benchmark revision showed on Tuesday. That was the largest downward revision on record. 

But what, if anything, does that mean for Fed policy? One might have thought it would strengthen bets for a 50 basis point rate cut next week. BUt that probability actually shrank a bit, around 5 bps of easing was taken out of the 2026 curve, and the dollar strengthened. Buy the rumor, sell the fact? 

* I Me Miners

Anglo American and Teck Resources are to merge in a $53 billion deal, marking the second-biggest mining M&A deal ever and creating the world's fifth-biggest copper company. Investors in both firms liked it - Anglo shares rose 9% and Teck shares leaped 11%.

Dealmaking activity has increased a lot this year. Global M&A hit $2.6 trillion in the first seven months of the year, the highest since 2021, and Morgan Stanley analysts reckon tight spreads, easy financial conditions, and a Fed willing to let the economy 'run hot' will keep that going.

* Inflation

Inflation is always a talking point, but the next few days will give a good snapshot of what the global landscape looks like - consumer price data from Brazil, India and China, and producer prices from Mexico, China and the US are all due out by Friday.

Then there's the big one on Thursday, the U.S. CPI inflation report for August. Consensus forecasts of 2.9% headline and 3.1% core annual rates, respectively, aren't expected to stop the Fed from cutting interest rates next week. But upside surprises could make that decision a lot less straightforward.

The Federal Reserve is widely expected to cut interest rates next week even though inflation is still around 3%, a full percentage point above the official goal. This raises an uncomfortable question: is the central bank's 2% inflation target still viable? 

Data on Thursday is expected to show that annual core CPI inflation held steady in August at 3.1%. Annual core PCE inflation, the Fed's preferred measure, was 2.9% in July. 

Easing policy with inflation at this level would be a rare step. 

Of course, the Fed cut rates late last year when core CPI was even higher at around 3.3%, though that move drew fire because unemployment didn't rise as Fed officials had warned and long-dated yields rose. 

If you want to find the last time before this cycle that the central bank eased policy with core PCE inflation at 3%, you have to go all the way back to the early 1990s, before the Fed unofficially adopted its 2% target. 

That's a long time ago, when the economy was in a very  different place. The internet as we know it barely existed,  there were no smartphones, and 'apps' was the abbreviation for  'appearances' in soccer players' stats.

So the prospect of the Fed easing policy for the second time in a year with core inflation at 3% is a big deal – and may be yet another sign that the economic orthodoxy of recent decades is being tested or trashed. Take your pick.