This afternoon at 4:00 PM, Fed Chief Jerome Powell will deliver his highly anticipated speech in Jackson Hole. Expectations on how dovish his message will be have slightly decreased, leading to a rise in US market interest rates and a strengthening of the dollar. Additionally, US stock markets took a hit.
However, there is still almost a 100 basis point cut priced in by the end of the year. This would mean a US policy rate of 4.25–4.50 percent by the end of December.
One reason to believe in rapid rate cuts, apart from inflation approaching more comfortable levels, is the significant downward revision of the US employment growth rate. On average, employment grew by 178,000 new jobs between last March and this year’s March. Previously, that number stood at 246,000 new jobs, making it an unusually large revision. The new figures are more aligned with pre-pandemic levels.
With clear signals of a cooling US labor market, a rate cut in September should be fairly certain. The market is hoping Powell will deliver this message, preferably with the indication of more rate cuts to follow. Additionally, the minutes from the Federal Reserve’s latest meeting also leaned towards a softer stance.
It will be interesting to see if the market has set its expectations too high or if there will be a small rally after Powell’s speech.
On the economic front, things look a bit trickier. Both in the US and Europe. While the composite purchasing managers’ index slightly increased in the eurozone with preliminary August figures, rising from 50.2 to 51.2, crossing the “magic” 50 threshold, this was largely driven by a significant jump in the French services index. There is suspicion that the services index was boosted by the Olympics and may fall back in the next reading.
Concerningly, the industrial purchasing managers’ index in the eurozone remains at very low levels, dropping to 45.6 in August, almost recession levels.
A similar pattern can be seen in the US, where the services index landed at a solid 55.0, while the industrial index fell to 48.0.
The purchasing managers’ indexes paint a somewhat peculiar economic picture. There is a significant risk that continued weakness in the industrial sector will eventually spread to the services sector. Ideally, a strong industrial sector would drive economic growth, indicating higher investment willingness from companies at large. Hopefully, the expected rate cuts, which are likely to come frequently in the near future, will also help boost the sentiment among industrial companies.
Analysis:
Jerome Powell’s speech in Jackson Hole has the potential to influence financial markets significantly. The expectations of rate cuts and the economic indicators discussed can impact investment decisions and market sentiment. It is essential for investors to monitor Powell’s message and its implications for the future direction of interest rates and economic growth.