All eyes on Powell

The euro and sterling have both lost more ground to the dollar ahead of Fed Chair Powell’s speech at Jackson Hole later today, despite stronger than expected Euro area and UK economic data and more of a mixed bag of US data. They have dipped to just under $1.16 and $1.34 respectively, leaving EURGBP again largely unchanged at around £0.8650. The market will be looking for some indication from Powell regarding the near-term path for US interest rates. While expectations for a rate cut at next month’s monetary policy meeting have been pared back considerably over the past week – having surged to almost 100% following July’s weaker than expected jobs report – there’s still plenty of room for the market to react depending on what Powell says – or indeed does not say – today.

Government bond yields moved up yesterday on the back of the economic data with UK yields rising by 4-6bps across the curve and German and US yields by just a bit less. Equity markets slipped ahead of Powell with the S&P 500 in the US closing lower for a fourth day running, albeit modestly so (-0.4%), and European stocks finishing down about 0.3% or so.

Ahead of Powell’s speech today, comments from Fed members yesterday highlighted the differing views about the appropriate path for interest rates over the short-term. One member (Hammack) said she does not “see the case” for a rate cut given inflation has been trending higher recently, while another (Collins) says she is open to a reduction in rates given the risk of “worsening labour market conditions”.

The latest flash PMIs for the Euro area and UK point to still relatively modest but slightly improving growth in the two economies. The Composite PMI for the Euro area rose for an eight month in a row in August to 51.1, the highest reading so far this year, while the equivalent index for the UK rose to 53.0 (also the highest reading year to date) led by a jump in services sector activity. The PMIs for the US pointed to solid economic growth this month, though separate labour market data showed an increase in both new and continuing jobless claims in the latest week.

Powell’s speech is obviously the main focus for markets today. it’s very quiet on the economic data front, with the ECB indicator of negotiated wages in the Euro area the only release of note.