The S&P 500 experienced a robust rise as Federal Reserve Chair Powell suggested potential policy adjustments due to existing restrictive conditions. Traders now foresee a roughly 82% chance of a rate cut in September, with easing totalling 54 basis points by the end of the year. This stock rally resulted from unwinding hedges rather than interest rate expectation changes.
Attention is shifting to the upcoming US Non-Farm Payroll report, which will influence interest rate forecasts. Strong data could lower the chance of a September cut to a 50/50 possibility, possibly causing a hawkish shift impacting short-term markets. Conversely, weak data might lead to increased expectations of a third rate cut, hence supporting the stock market.
The S&P 500 Response
The S&P 500 rebounded from a major trendline around the 6,365 mark, with momentum increasing after Powell’s remarks. Any further pullback to this trendline might attract buyers, while a breakdown might see sellers driving it towards the 6,200 level.
On shorter charts, the 1-hour timeframe shows a break above a descending trendline, driving buyers to boost bullish positions before a pullback. Key reports for this week include the US Consumer Confidence, Jobless Claims, and the PCE price index.
Powell’s recent comments suggest the Fed is open to adjusting its stance, which fueled last Friday’s S&P 500 rally. Much of this move was not just new buying, but traders unwinding hedges as fears of more rate hikes faded. In fact, we saw the CBOE Volatility Index (VIX) drop below 14, confirming that protective puts were being closed out.
Traders are now betting heavily on a rate cut, with the CME FedWatch Tool showing an 82% probability of a 25 basis point cut for the September 17th meeting. The market has priced in a total of 54 basis points of easing by year-end, implying a second cut is almost a certainty for December. This shift in expectations is the main driver for market sentiment right now.
Anticipated Economic Indicators
Our focus now shifts to the critical US Non-Farm Payrolls report due next week. Economists are forecasting a headline number of +170,000 jobs for August, a slight cooling from the +185,000 we saw reported for July 2025. A number significantly above this forecast could challenge the September cut narrative and cause short-term weakness.
Conversely, a soft jobs report would likely solidify dovish bets and could even lead traders to price in a third rate cut by the end of the year. In this scenario, we would expect to see continued support for equities. This setup feels similar to the market pivot we saw back in late 2023, where weakening economic data finally gave the Fed cover to signal an end to its hiking cycle.
For derivative traders, this means watching the 6,365 level on the S&P 500, which has proven to be strong support. Buying short-dated call options or selling puts near this trendline could be a viable strategy to position for more upside if upcoming data is soft. A decisive break below this level, however, would signal a shift in momentum towards the 6,200 target.
Before the NFP report, we must navigate key data this week, including today’s Consumer Confidence number, which is expected to dip slightly to 101.5. However, the main event this week will be Friday’s PCE price index, the Fed’s preferred inflation gauge. Remember, the Core PCE for July 2025 was still at an annualized 2.7%, so any sign of it cooling further will be seen as very positive.
