US Economy Showing Signs of Slowdown, Impacting Market Expectations
Recent data releases have caused fluctuations in market pricing for end-2024 Fed Funds rates. Prior to the release of July labor market data, rates fell to 3.85% from 4.66%, only to bounce back to 4.2% after stronger ISM services data and comments from Fed Chair Jay Powell. However, there is skepticism in the market regarding the likelihood of a 50bp rate cut in September, according to Société Générale’s FX strategist Kit Juckes.
Juckes notes that market participants are currently pricing rates slightly above 3% in three years, a level seen back in 1992 when inflation expectations were higher. The rapid decline in rates suggests a potential significant slowdown in the US economy. While Chair Powell emphasizes the importance of the labor market, uncertainties remain about the extent of the slowdown and its impact on future rate cuts.
While the speed and severity of the slowdown are critical for rates, equities, and credit markets, the FX market is focused on the impact of the slowdown on the US dollar. The market anticipates a reduction in long dollar positions as the economy softens, with potential benefits for Latin American currencies in a milder slowdown scenario. However, G10 currencies are expected to strengthen against the dollar regardless of the severity of the US slowdown.
Analysis:
The US economy is showing signs of a slowdown, leading to fluctuations in market expectations for future Fed Funds rates. While uncertainties remain about the extent of the slowdown and its impact on rate cuts, the FX market is anticipating a weakening of the US dollar. This could result in a strengthening of G10 currencies against the dollar, with potential benefits for Latin American currencies in a less severe economic downturn. Investors should monitor these developments closely to make informed decisions about their portfolios and financial strategies.