Goldman Sachs: labour market "not that interesting" as inflation dominates Fed debate
The desk conveys that inflation concerns remain at the forefront of the Federal Reserve's policy decisions, with labour market dynamics playing a secondary role in shaping market sentiment. Per the full note from Goldman Sachs, the recent CPI print prompted a modest bond market rally as the likelihood of a Fed rate hike in September eased slightly. Notably, ongoing Treasury issuance pressures and strong corporate debt supply are contributing to a persistent rise in long-term yields—a dynamic expected to continue despite soft near-term data surprises from the employment sector.
What the desk is arguing
The desk emphasizes that while labour market indicators are softening, inflation takes precedence for the Fed's next moves. Goldman Sachs notes that the cooler-than-expected PPI reading has not altered the overarching narrative that inflation remains the key variable for monetary policy direction.
Supporting this assertion, Goldman reports that the CPI data was mostly in line with expectations, although they anticipate core PCE to decrease towards 2% by next year. This reinforces the view that the current tightening cycle may not yet be fully priced into markets, hence expecting a curve steepener trade to take advantage of potential shifts in policy trajectory.
Where it sits in our coverage
For EUR/USD, the current spot is 1.1466, with a consensus target of 1.1700 (range: 1.1200–1.2000) by March 2026. Specific firm targets for this pair include: - Goldman: Mar26 1.1800 - Morgan Stanley: Mar26 1.2000 - Rabobank: Mar26 1.1759
The desk's view aligns closely with Goldman, which suggests a target within the upper range of the consensus, indicating a potential bullish stance compared to peer forecasts. The divergence is marked against bears such as UBS with a middle range estimate aligned towards prolonged USD strength.
How other firms see it
Firms such as Goldman, Morgan Stanley, and Commerzbank maintain bullish views on the euro against the dollar, signaling a consensus for upward movement. Conversely, contrary views are held by firms like UBS, which suggest a more cautious approach towards a weakening dollar as long-term structural factors play out.
In relation, watch the GBP/USD trajectory as it may intersect with the Fed's decisions on interest rates, revealing market sentiment shifts directly influenced by inflation data.
How firms align with this view
Key takeaways
- 01Inflation remains the dominant factor influencing the Fed's policy direction.
- 02Recent CPI and PPI readings have led to slight easing in Fed rate hike expectations.
- 03Structural pressures from Treasury issuance are pushing long-term yields higher.
- 04The labour market data is secondary to inflation concerns that are shaping the monetary policy landscape.
Market implications
Traders should be attentive to bond market movements and Fed commentary as potential catalysts for shifts in currency levels, particularly watching for a reversal in sentiment around the 1.1700 consensus target for EUR/USD. Upcoming retail sales data may further impact the market outlook ahead.
Risks to this view
A significant rebound in the labour market or unexpected inflationary pressures could force the Fed to reconsider its current trajectory, potentially invalidating the desk's bullish bias in the currency pairs discussed. A surprise rate hike or hawkish guidance could lead to a stronger dollar.
EUR/USD — All Desk Targets
| Firm | Stance | YE 2026 |
|---|---|---|
MUFG | Bullish | 1.1800 |
Danske Bank | Bearish | 1.1100 |
UBS | Bullish | 1.1800 |
All 27 desk targets for EUR/USD
Last week's in-line CPI print triggered a modest bond rally, with pricing for the Fed's September meeting easing slightly, according to Goldman Sachs. A cooler than expected PPI reading then helped push the S&P 500 to a record closing high last Thursday. Goldman flags that heavy Treasury issuance and record corporate debt supply tied to the AI infrastructure buildout remain structural, compounding forces behind rising term premium at the long end of the curve, a dynamic expected to persist regardless of near term data surprises.
Softer employment data is viewed as largely irrelevant to the policy path, with inflation retaining primacy in the Fed's reaction function. The bank's preferred expression of these dynamics is a curve steepener, reflecting fair value at the front end against ongoing long end pressure, with the biggest payoff reserved for a recession scenario that is not currently the base case.--- Goldman Sachs says inflation still calls the shots for the Fed, even as cooler PPI data sends the S&P 500 to a record and structural Treasury supply keeps grinding long term yields higher. Summary: Goldman Sachs' Mike Mitchell said the week's CPI print was roughly in line, with core CPI up 21.5 basis points, though the read-through to core PCE looked softer (GS expect core PCE to continue to fall towards 2% next year).
PPI data released since then came in cooler than expected, helping send the S&P 500 to a record closing high last Thursday. September Fed meeting pricing eased slightly to around nine basis points after the CPI data; retail sales data has also since been released. Goldman Sachs says market pricing for Fed Funds is still too high, GS is not as hawkish.
Weaker recent payrolls data is not seen as a significant driver of Fed policy; Mitchell said demographic and immigration shifts mean little job growth is needed to hold the unemployment rate steady. Persistent fiscal deficits and heavy Treasury issuance are cited as structural drivers of rising term premium, alongside AI-related corporate debt issuance Goldman estimates at $250 billion this year and up to $400 billion next year. The week's 10-year Treasury auction was the highest-yielding since 2007 but was well absorbed; the 30-year auction that followed also went smoothly.
Mitchell's preferred trade is a yield curve steepener, with the biggest payoff in a recession scenario he does not view as imminent. Goldman Sachs treasuries and inflation trading head Mike Mitchell said the week's CPI print landed roughly in line with expectations, with core inflation up 21.5 basis points, though the read through to the Fed's preferred core PCE gauge looked somewhat softer given a heavier weighting toward services categories that came in soft. He said the print should give the Federal Reserve some comfort heading into its September meeting, speaking on Goldman Sachs' Markets podcast.
PPI data released since then also came in cooler than expected, a reading that helped send the S&P 500 to a record closing high last Thursday. Bond markets rallied modestly on the CPI data, with pricing for the September meeting easing by a few basis points to around nine basis points. Mitchell said he does not see the week's weaker payrolls report, the first month of negative job growth in some time, as a significant driver of the September decision.
He noted that demographic shifts and changes in immigration policy mean the labor market needs little job growth to hold the unemployment rate steady, which has barely moved over the past year, and that inflation, not employment, remains the Fed's central focus. On the fiscal side, Mitchell pointed to a persistently difficult US budget outlook, a dynamic he described as global rather than US specific, as a structural driver of rising term premium in the bond market. He cited investor discomfort after the Fed chair's comments following the July meeting suggested higher long term yields could substitute for further policy rate moves, a stance the back end of the curve did not welcome.
The week's 10 year Treasury auction, the highest yielding since 2007, was nonetheless well absorbed, helped by the softer inflation data, and the subsequent 30 year auction saw a similarly smooth outcome as the cooler PPI reading reinforced the disinflation narrative. He added that heavy corporate debt issuance tied to AI infrastructure buildout, which Goldman estimates could reach $250 billion this year and as much as $400 billion next year, is compounding the same upward pressure on term premium as government supply. Mitchell argued current real yields, near 2.5 percent at the 10 year point and closer to 3 percent at 30 years, are historically elevated and offer value for long horizon investors, alongside a diversification benefit that would reassert itself in a recession or growth shock scenario.
His preferred trade is a curve steepener, on the view that front end and belly yields already price likely Fed action while the long end faces ongoing structural headwinds from fiscal and corporate supply. With the CPI, PPI and retail sales releases now behind the market, Goldman is turning its attention to minutes from the Fed's July meeting for further clues on the tone of the September policy debate. This article was written by Eamonn Sheridan at investinglive.com.
Sources & References
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