"The time has come for policy to adjust, and the direction of the travel is clear" said Federal Reserve (Fed) Chair Jerome Powell at his Jackson Hole speech on Friday.
He didn’t give any guidance regarding the size of the coming rate cut despite speculation of at least one jumbo rate cut before the end of the year. Instead, he kept the door open for large cut bets.
"The pace of rate cuts will depend on the incoming data, the evolving outlook and the balance of risks" he said.
And Chicago Fed’s Governor Goolsbee said that it’s time to pay more attention to the employment side, making it clear for everyone that – as the inflation side seems to be under control – the developments in the employment leg will determine the size of the cuts. And the employment data of late has been weak – not alarmingly weak just yet but weak enough - to keep the doves in charge of the market after Powell’s dovish speech last Friday.
The US yields and the US Dollar Index further dived. The yields and the dollar are now waiting impatiently for the week’s jobs data update – as the jobs data gains importance after a long focus on inflation.
But before that, we will be watching the US GDP update this Thursday and the core PCE index – the Fed’s favourite gauge of inflation on Friday. The US GDP is expected to have rebounded to 2.8% in Q3, from 1.4% printed a quarter earlier. But Atlanta Fed’s GDP Now index suggests that the Q3 growth may be slower than that – around 2%. Sufficient weak growth and inflation figures should keep the Fed doves in the playground before next week’s jobs data.
The expectation of a 50bp cut has been rising slowly but surely. And the risk assets are surfing on that vibe in the absence of a major stress. The S&P 500 and Nasdaq extended gains by more than 1% and the Russell 2000 index jumped more than 3% on Friday. I remain convinced that a 25bp cut is the right dose of dovishness to help keep appetite intact in the stock markets.
In the FX, the US dollar’s further dive pushed the EUR/USD to 1.12 on Friday, but the pair sees resistance at this level in Asia this morning, and I still believe that the euro’s recent surge is overdone against the US dollar and a correction would be healthy at the current levels.
This week, the Eurozone countries will be releasing their preliminary CPI numbers for August and the expectations are weak. EZ headline inflation may have eased from 2.6% to 2.2%, while core inflation is still seen a bit sticky slightly below the 3% mark. But inflation in Europe seems to be in check as well – a situation that should allow the European Central Bank (ECB) to continue cutting the rates.
European economies need the rate cuts more than the US does, but the ECB is expected to cut by 50bp before the year ends vs the 100bp cut expected for the Fed. Hence there is a growing room for a dovish adjustment for the ECB expectations.
Finally, crude oil gained on Friday along with risk assets, and bulls are joining in this morning on news that Israel has declared a 48-hour state of emergency after launching a pre-emptive strike on Hezbollah sites in Southern Lebanon, in anticipation of a response to last month’s assassination of its military chief.