By Jamie McGeever

ORLANDO, Florida (Reuters) -TRADING DAY

Making sense of the forces driving global markets

By Jamie McGeever, Markets Columnist

Stocks, 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, as 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%.

If you have more time to read, here are a few articles I recommend to help you make sense of what happened in markets today.

1. U.S. employment growth through March revised sharplylower 2. Anglo American, Teck Resources to merge insecond-largest mining deal ever 3. Europe could escape the bond ‘doom loop’. The U.S., notso much: Klement 4. Will ECB be left holding central bank ‘independence’baton?: Dolan 5. Ishiba’s departure gives BOJ pause for thought on ratehikes

Today’s Key Market Moves

* STOCKS: Japan’s Nikkei hits record high but closeslower, MSCI Asia and MSCI EM hit 4-year highs, Europe flat, S&P500 and Nasdaq notch record closing highs. * SHARES/SECTORS: UK miners rise 2.7% on Anglo/Teck deal,shares in both surge; Fox Corp -6% on Murdoch secondaryoffering; UnitedHealth +8.6% on Medicare enrollments. Oraclesurges 22% in after-hours trade on cloud revenue forecasts. * FX: China’s yuan hits 2025 high in spot market, PBOCfix. Indonesian rupiah -1%. U.S. dollar up broadly, gains mostvs Swissie in G10 space. * BONDS: French/Italian 10y spread down to 2 bps,narrowest since 1999. U.S. curve flattens for fifth day, bearflattening this time. * COMMODITIES: Gold hits new high of $3,674/oz. Now upmore than $1,000 this year, almost 40%.

Today’s Talking Points:

* 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 U.S. 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.

Fed rate cut now signals 3% inflation is the new 2%

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 CPIinflation held steady in August at 3.1%. Annual core PCEinflation, the Fed’s preferred measure, was 2.9% in July.

Easing policy with inflation at this level would be a rarestep.

Of course, the Fed cut rates late last year when core CPIwas even higher at around 3.3%, though that move drew firebecause unemployment didn’t rise as Fed officials had warned andlong-dated yields rose.

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

That’s a long time ago, when the economy was in a verydifferent 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 timein a year with core inflation at 3% is a big deal – and may beyet another sign that the economic orthodoxy of recent decadesis being tested or trashed. Take your pick.

UNORTHODOX

Inflation hawks fear it’s the latter. The federalgovernment’s debt and deficit are at record levels fornon-crisis, peacetime, and there are fears that long bond yieldscould start climbing again.

But markets don’t seem too worried.

To be sure, inflation fears are reflected in some assetprices, not least gold, which is up nearly 40% this year,printing record highs on a near daily basis.

But look around, and it’s difficult to argue that financialmarkets are overly worried about the potential loosening of theFed’s 2% target.

Indeed, the 2s/30s yield curve may have steepened around 70basis points this year to a four-year high of 134 bps last week,but the 30-year yield is actually down slightly this year.

Meanwhile, U.S. corporate bond spreads are at historictights, and Wall Street continues to hit record highs.

Of course, equity markets have historically tended to sizzleas inflation has heated up, though usually not for long andcertainly not once consumer inflation expectations becomeunanchored. We’re not there yet, but we are at an interestingjuncture.

HIGH EXPECTATIONS

Academic research suggests consumers are among the leastaccurate forecasters when it comes to inflation, butpolicymakers have long been loath to dismiss them. And rightnow, 2% is not on consumers’ inflation horizon.

A New York Fed survey on Monday showed consumers’ one-yearoutlook rose to 3.2% in August from 3.1% in July, while thethree- and five-year forecasts were unchanged at 3% and 2.9%,respectively. The University of Michigan’s latest one- andfive-year forecasts are 4.8% and 3.5%.

So perhaps 3% is starting to become the new 2%.

U.S. President Donald Trump would certainly seem to supportthis, given his apparent desire to run the economy hot. And theFed looks set to shrug off inflation risks – and ease in a 3%environment – for the second time in a year.

Is this a misstep by the Fed, or even policy error? Notnecessarily.

‘HYSTERIA AND DELIRIUM’

Retired strategist Jim Paulsen questions the “constanthysteria” around inflation exceeding the Fed’s target. To getsome perspective on this “2% target delirium,” Paulsen notesthat annual headline CPI has averaged 2.9% over the last twoyears and is currently only 2.7%. Price stability, anyone?

He also points out that from 1992 to 1999, a period oftenviewed as “economic nirvana,” headline CPI averaged 2.6%.

“It’s time to retire the 2% inflation target. We have alwaysput smart, street-savvy, driven, and economically war-testedindividuals on the FOMC. Let’s let them use their venerablejudgments to do their job without tying their hands to somerandom target which has never been well tested,” Paulsen wroteon Monday.

A 3% inflation print on Thursday followed by a rate cut nextweek might suggest we are heading in that direction.

What could move markets tomorrow?

* Australia consumer sentiment (September) * Japan tankan index, manufacturing (September) * China CPI and PPI inflation (August) * European Central Bank board member Claudia Buch speaks * Brazil inflation (August) * U.S. producer price inflation (August) * U.S. Treasury auctions $39 billion of 10-year notes

Want to receive Trading Day in your inbox every weekday morning? Sign up for my newsletter here.

Opinions expressed are those of the author. They do not reflect the views of Reuters News, which, under the Trust Principles, is committed to integrity, independence, and freedom from bias.

(By Jamie McGeever; Editing by Nia Williams)