Insights 
VT 
Federal Reserve Chair Powell remains open to a policy move in September, acknowledging risks to the labour market and economy. His remarks were interpreted as a lean towards a dovish policy, sparking traders to predict an 84% chance of a 25 basis point rate cut next month.
The non-farm payrolls data on 5 September will be crucial in confirming this. Powell emphasised the Fed’s reliance on economic data, implying that weaker labour market figures could validate a rate cut.
Markets Dismissing Data
If the upcoming jobs data are weaker, a rate cut in September seems likely. Continued pressure on the Fed, especially from political figures, may persist even with a cut. Conversely, stronger jobs numbers could complicate the narrative, leaving markets uncertain.
In such a scenario, markets might dismiss the data, viewing it as temporary stability, while still anticipating a September rate cut. The Fed faces the challenge of meeting market expectations amidst this backdrop.
Powell has not committed to a rate cut. If tariffs significantly affect inflation, and the labour market stays strong, urgency for a rate move may diminish. The July inflation data provided minimal impact, suggesting the Fed might endure bond market pressures before making significant policy shifts.
Looking back at similar situations, like the one in 2019, gives us a playbook for the current market uncertainty following the Jackson Hole symposium. With Fed Chair Powell acknowledging downside risks, markets are now leaning heavily into a dovish pivot. The CME FedWatch Tool now shows traders pricing in a 75% probability of a 25-basis-point cut at the September 2025 FOMC meeting.
Potential Market Reactions
The upcoming non-farm payrolls report on September 5th is now the pivotal event for the market. After the last report for July 2025 showed a notable slowdown, adding only 150,000 jobs, another soft number would all but guarantee a rate cut. For derivative traders, this makes short-term bullish plays, like buying near-term index call options, a high-probability bet if you believe the labor market weakness will continue.
However, a stronger-than-expected jobs report would create significant uncertainty and challenge the current market consensus. This scenario suggests buying some protection, like short-dated puts on major indices, or using straddles to play the potential spike in volatility. The VIX has been hovering around 18, up from its summer lows, indicating the market is already pricing in some of this upcoming tension.
We also have the US CPI report to consider, though it arrives during the FOMC blackout period. After the latest reading for July 2025 registered at 2.8%, another soft inflation print would give the Fed more room to act. For traders, this means positioning for a dovish Fed might involve longer-dated options, such as call spreads on rate-sensitive sectors, to capitalize on a confirmed easing cycle.
The bond market’s reaction is another critical signal to watch closely. We have seen in past cycles, such as the period leading up to the 2019 cuts, that a rapidly falling 10-year Treasury yield can pressure the Fed. If long-term yields drop sharply after the jobs data, regardless of the headline number, it could signal that the bond market is forcing the Fed’s hand.
