• July 2024 FOMC: Fed left rates unchanged, Powell puts Sep rate cut on the table
   
• The Jackson Hole Symposium will be held on August 22-24
   
• Markets are gearing up for the Jackson Hole Symposium

• A troubling jobs report as unemployment rate unexpectedly jumped to 4.3% in July

• Fed Chairman Powell speaks on Friday (14.00 GMT)

• USD on the edge

• Markets expect a dovish tone in support of a September rate cut

The much talked-about Jackson Hole Symposium will start on 22 August with the markets anxiously waiting for Fed Chairman Powell’s speech. The overall Fedspeak during this 3-day gathering could determine the Fed’s rate strategy for the rest of 2024, but also set the basis for its monetary policy stance in 2025

The annual meeting at Jackson Hole could be dramatic. Federal Reserve Chair Powell will address the gathering on Friday, ahead of a widely expected Fed rate cut next month. It is practically a given that the Fed will loosen policy, but by how much?

The most likely scenario is a quarter-point cut, but earlier this month, the financial markets were routed and expectations for a large half-point cut soared. With inflation under control, the Fed is keeping a close eye on the US labor market, and Powell’s take on the economic outlook could move the markets.

July 2024 FOMC: Fed left rates unchanged, Powell puts Sep rate cut on the table
The US Federal Reserve (Fed), in its 30/31 Jul 2024 Federal Open Market Committee (FOMC) meeting, unanimously agreed to keep the target range of its Fed Funds Target Rate (FFTR) unchanged at 5.25-5.50%, as was widely expected by markets. This was the eighth consecutive pause by the Fed after having raised rates for ten meetings in a row before taking a first pause in Jun (2023) followed by another 25 bps hike in Jul (the last hike in the current cycle).

The significant change in the July monetary policy statement (MPS) was the shift in the Fed’s focus to the dual mandate instead of just on inflation. Powell’s subsequent commentary was viewed as dovish, putting a September rate cut on the table, if inflation cools in line with expectations, and the solid labor market conditions are maintained.

A troubling jobs report as unemployment rate unexpectedly jumped to 4.3% in July.

July’s US employment report unnerved global markets. Growth in nonfarm payrolls slowed and grew only 114k in July, well below expectation of 176k, and also well below average monthly gain of 215k over the prior 12 months. The unemployment rate rose to 4.3%. The unemployment rate rise held particular significance for many in the market. It triggered the Sahm Rule where this rule highlights that whenever the three-month moving average of the unemployment rate (currently 4.1%) rises a half-a-percent (0.5pp) off its prior 12- month low (currently 3.6%), the economy has fallen into a recession. However, the latest services PMI index has risen to 51.4 from 48.8. As such this does not fit the impending recession narrative that has gripped markets. The output metrics imply a slowing, but not collapsing economy. Meanwhile, unemployment claims dropped by 7K to 227K (Est: 235K) for the week ending August 10, easing concerns of an imminent recession that had triggered a global stock market downturn earlier in the month. Additionally, recent inflation figures reinforced optimism about a potential soft landing for the economy. This data is particularly crucial as market participants are closely monitoring employment figures following the triggering of the Sahm Rule.

The financial markets continued to see extreme volatility, but the global rout seems to have paused for now. The violent market reactions to July’s US labour report continued to backtrack, suggesting that the initial knee-jerk response was overdone.

Following the recent stocks’ rout, which was fuelled by US recession fears, the market is currently pricing in 100bps of easing in 2024 and another 100bps in 2025. According to the latest poll, most investment houses expect three rate cuts in 2024, but some diehards continue to talk about a 50bps rate cut in September.

Powell will speak on Friday

On Friday, Chairman Powell is expected to present his view on the current US economic outlook. He will most likely talk about the ongoing easing in labor market, tightness, the growing level of confidence regarding the disinflation process and the Fed’s willingness to cut rates. It is a crucial test of Powell’s ability to appease Fed members in order to secure strong support going into the September meeting, and to avoid attracting the ire from both US Presidential candidates and especially Donald Trump.

Markets initially added to 50bps rate cut bets on slightly below consensus PPI numbers, but later on retraced somewhat after CPI showed continuing disinflation though in line with forecasts. Survey data (Empire Manufacturing), activity figures (retail sales) and labour market data (jobless claims) all helped putting the early August recession scare to bed.

Attention shifts to the Fed’s Jackson Hole symposium later this week. In line with guidance at the July meeting, we think Fed Chair Powell will confirm the likelihood of a September policy rate cut. However, we do not expect him to echo the market drum of kicking things off with a 50bps move. Fed Chair Powell could not formally close the door on 50bps neither though with plenty of data (ISM’s, payrolls, CPI) still to be released ahead of the September 18 FOMC meeting. Such scenario will keep the USD in the defensive while preventing a significant return higher in US bond yields.

In our view, there are four likely scenarios:

Scenario 1: Dovish minutes, Powell pre-announces a September rate cut at Jackson Hole – 10% probability

This could be the perfect scenario for the market as not only Powell will reveal the worst kept secret that the Fed will cut rates in September, but he could also keep the market hoping for a 50bps rate cut. Barring any comments about an imminent US recession from Powell, equities could enjoy another strong day with the dollar most likely suffering across the board.

Scenario 2: Dovish minutes, Powell is dovish but does not pre-announce a rate cut – 50% probability

Powell confirms expectations by talking about Fed’s willingness to cut rates if the current momentum in the economy is maintained and assuming that no negative surprises come from both the Middle East and Russia-Ukraine conflicts. Stock markets could feel a degree of disappointment, but the recent positive sentiment should linger. The dollar will probably remain under pressure across the board in this scenario.

Scenario 3: Balanced minutes, Powell talks about data dependency – 30% probability

A more balanced speech by Powell, highlighting data dependency, but keeping the door firmly open to rate cuts, if needed, might upset the market and potentially result in a small correction in equities. The recent rally in stocks has been very gradual, potentially reflecting low confidence from investors. The dollar might have the chance for a small rebound.

Scenario 4: Balanced minutes, Powell appears hawkish – 10% probability

A strong set of PMI surveys on Thursday and Powell appearing more hawkish than anticipated could really result in a sizeable risk-off reaction. Powell could acknowledge the progress made regarding the Fed’s dual mandate but state that the Fed has not reached the point of seriously discussing rate cuts. Equities could be under severe pressure with the dollar potentially recouping most of its losses during August.

USD on the edge

The US dollar index (DXY) took another dive and hit the lowest levels since the beginning of January. US Dollar (USD) remains under broad-based selling pressure, with markets likely to keep this trend until Fed Chair Jerome Powell delivers his speech at the Jackson Hole Symposium on Friday.

The US dollar has fallen to its lowest levels of the year, losing more than 2.3% from its August peak and around 4% since early July as expectations of a Fed rate cut in September began to be priced in. The dollar index has retreated to 101.4, reflecting growing expectations of Fed easing. Expectations of looser Fed policy in the coming quarters are also undermining the dollar’s position. In the first half of the year, the prevailing narrative was that lower inflation was allowing monetary policy normalisation to begin. In recent weeks, however, the narrative has shifted towards easing to stave off a recession.

From a technical perspective, the DXY Dollar Index is now near the lower end of its range from early 2023. This range does not have a clear bottom. Technically, Fed Chair Powell could save the dollar at his Jackson Hole symposium later this week. However, there is an equal chance that his dovish tone, which observers are waiting for, will give the dollar carte blanche to weaken further and break long-term support.

If Powell strips the markets of their illusions of a 100bps rate cut by the end of the year, with relatively neutral employment data and inflation at 3%, which is still above target, it will bring buyers back into the dollar. In such a scenario, we could see the DXY move back towards the upper end of the last two years’ range (106.2-107.0) before the end of the year.

On the other hand, aggressive rate cut bets keep the dollar in the defensive. A softer dollar remains the way to go. The less restrictive monetary policy where money markets are hoping for should help accommodate the US soft landing and especially rule out the downside recession risk. It’s what helped US stock markets stage an impressive comeback since the August 5 market meltdown.

The sweet soft-landing spot
This week markets kicked off on a positive note on expectation that when Fed Chair Jerome Powell speaks at the Jackson Hole meeting on Friday, he will deliver a strong hint that the rate cuts will begin soon in the US. How soon? Probably in September? By how much? Probably a reasonable 25bps? Would the markets be upset with the idea of a 25bps cut instead of a 50bps? Probably not, because a 50bps cut would require a severe economic slowdown, a crisis or a panic mode, which is not good for risk appetite. Therefore, the best of both worlds would be the hint of a 25bps cut that would keep the market mood in the sweet soft-landing spot. And this is what investors hope to hear. And that hope has pushed the S&P500 and Nasdaq up. In summary, both the Big Tech and small companies in the US gained with the thought of an approaching rate cut in the US.

Source: BIMB Securities Research - 22 Aug 2024