What will Jackson Hole tell us about the timing of US interest rate cuts?
Markets have been following every word Federal Reserve (Fed) members say extra closely after a mixed set of US data. The next focus is what Fed Chair Powell says at the annual Jackson Hole economic symposium of global central banks, where he may hint about the timing and scale of US interest rate cuts.
Recent economic data has sent markets on a roller coaster ride – from excitable predictions of an inter-meeting Fed policy rate cut to a more orderly ~90bp of cuts at official meetings by year end. Rising unemployment in the US sparked fears of a US recession and drove investors to increase the probability of an inter-meeting Fed rate cut. These fears then faded as subsequent data suggested that while the US economy and jobs market had softened, it remains resilient.
NatWest economists expect Powell to signal that an interest rate cut at their next meeting (September) as their base case, assuming no meaningful surprises in the data. But his comments may fall short of validating our expectations for a 50bp cut in September.
For the USD, increasing confidence of imminent rate cuts and indicators of slowing growth are both headwinds, in my view.
Indeed GBP/USD has broken the psychologically important $1.30 level for only the second time this year. Aside from reasons stated above, shifts in sentiment around November’s US Presidential election may also be impacting the USD.
GBP recovery continues, but how far can it go?
It’s a light UK data calendar this week, with UK Public Sector Net Borrowing (PSNB) data on Wednesday and the Purchasing Managers’ Index (PMI) numbers on Thursday. Government borrowing hasn’t historically had a meaningful impact on sterling. However, this may change as the Budget approaches and there are large gaps in the government finances (as highlighted by the new government). I’ll be watching the market reaction to any signs of increased fiscal concerns.
In my opinion, FX markets will examine Thursday’s PMIs for signs that the economy’s stronger-than-expected performance has continued into the third quarter, alongside data suggesting an improvement in real estate markets.
Might data derail a September rate cut in Europe?
With the European Central Bank (ECB) remaining data-dependant, the key data to monitor this week include euro area PMIs and Q2 negotiated wages agreements.
NatWest European economists expect the PMIs to soften in August, reflecting slowing growth within the service sector, and weak manufacturing activity.
NatWest European economists expect a slight uptick in negotiated wage agreements, but I don’t think this will be enough to deter the ECB from cutting rates in September, especially given the backwards-looking nature of the data release.
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