Barclays: The market has largely priced in the Fed's hawkish expectations; non-farm payrolls and CPI will be key to a "reversal".

Soaring oil prices, coupled with growing policy divergence within the Federal Reserve, are pushing global stock markets into a highly sensitive period. According to a recent report by Barclays, rising oil and European natural gas prices are again pushing up inflation and interest rate risks, and with the support of the second-quarter earnings season waning, the market is once again being driven by macroeconomic factors.

However, Barclays also points out that the market has already priced in a significant degree of hawkish expectations, with the probability of a Fed rate hike in September currently priced in at about two-thirds. As US economic activity shows signs of slowing, the current policy trade could reverse if subsequent employment and inflation data weaken.

Therefore, tonight's non-farm payrolls and next week's CPI will be key to determining the market's next direction. If the data falls short of expectations, the market may resume trading on a cooling economy and declining interest rates; conversely, if inflation continues to exceed expectations, the combination of rising oil prices and tightening monetary policy will continue to suppress risk assets.

Meanwhile, another potential theme exists in the European market: the Russia-Ukraine situation. Barclays believes that once substantial progress is made in the ceasefire negotiations, energy prices, interest rates, and geopolitical risk premiums may all decline simultaneously, and European cyclical stocks, especially those in the German market, are expected to see a revaluation.

Hawkish expectations have already been priced in; non-farm payrolls and CPI will determine whether a "reversal" occurs.

Oil and European natural gas prices have recently risen rapidly, once again becoming a significant disruptive factor for global stock markets. Barclays points out that European TTF natural gas prices have risen to their highest level since early 2023, and rising energy costs are not only pushing up inflation expectations but also suppressing stock valuations by raising bond yields.

Meanwhile, Warsh's hawkish remarks at the Jackson Hole conference further reinforced expectations of tightening. The market has now priced in a probability of a Fed rate hike in September of about two-thirds, with Barclays economists even predicting that the Fed will raise rates once in September and once in December, and the European Central Bank may also raise rates again this month.

However, Barclays believes that hawkish expectations have already been largely priced in by the market. Given the slowdown in US economic activity, if subsequent data fails to further reinforce expectations of rate hikes, the interest rate trade could reverse.

Therefore, upcoming employment and inflation data are particularly crucial. The US August non-farm payroll report and next week's August CPI will directly test whether the current hawkish pricing can continue to be revised upwards. If the data is significantly lower than expected, interest rate pressures may ease, and stock valuations may also have a breathing space.

The August PPI will be released on September 10, with the market expecting a month-on-month increase of 0.4%, compared to 0% previously; the August CPI will be released on September 11, with the market expecting a month-on-month increase of 0.4%, compared to 0.1% previously.

Beyond oil prices, the Russia-Ukraine situation may open a window for a "revaluation" of European markets.

Rising energy prices are disrupting the previous rotation in European stock markets. Barclays points out that although European natural gas prices are still far below the extreme levels seen at the beginning of the Russia-Ukraine conflict in 2022, the recent surge has put renewed pressure on European stocks, especially cyclical sectors sensitive to energy costs.

However, there is a potential catalyst for the European market – a ceasefire between Russia and Ukraine. Barclays believes that if the negotiations achieve credible and substantial progress, the impact will not only be geopolitical, but energy prices and inflationary pressures may also decline simultaneously, leading to a drop in European bond yields.

This will bring a double boost to European stocks: lower energy costs will improve corporate earnings, while narrowing risk premiums will drive valuation recovery. The resilience of the German market may be particularly evident.

From an industry perspective, the automotive, raw materials, and other energy-intensive sectors are expected to directly benefit from lower energy costs, while the industrial and infrastructure sectors may be trading in anticipation of Ukraine's post-war reconstruction. Conversely, defensive sectors such as energy and utilities may face relative pressure.

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