Powell opens door to Sept rate cut
Fed Chair Jerome Powell opened the door to a cut in interest rates at next month’s monetary policy meeting in his Jackson Hole speech on Friday, prompting a decline in US bond yields, a rally in US stocks to fresh record highs, and a fall in the dollar. The latter is trading at around $1.1715 and $1.3510 against the euro and sterling respectively this morning, down from around $1.16 and $1.3420 just before Powell spoke (EURGBP is a touch firmer, trading at around £0.8670). It may not be just one-way traffic lower for the dollar from here though. While the chances of a September rate cut have increased, the Fed is not necessarily about to embark on a series of quick-fire cuts, nor is the market expecting one. Indeed there are some key US economic data releases due over the next few weeks , including inflation and employment reports, which could cause the market to cast some doubt on a September move.
US bonds rallied on the back of Powell remarks as the market raised the chances of a September rate cut (now back up at around 70%), with 2-year yields closing around 10bps lower on Friday and 10-yeat yields down about 7bps. German and UK yields lagged the move in US yields, ending around 2-4bps lower on the day. In equity markets, the three main US indices (Dow, S&P 500 and Nasdaq) all closed at new record highs as they chalked up gains of 1.5% to 2%, while European stocks advanced by around 0.5%.
In Friday’s speech, Powell noted that, while “risks to inflation are tilted to the upside, downside risks to employment are rising,” adding that “if those risks materialize, they can do so quickly in the form of sharply higher layoffs and rising unemployment.” This in turn he said “may warrant adjusting our policy stance”, the signal that the Fed may lower rates in September.
In contrast to the Fed, the ECB is in a relatively comfortable position regarding monetary policy – the Euro area economy is expanding at a modest pace and inflation is “on target” at 2% – with a number of members over the weekend pointing to a period of steady interest rates ahead.
It is relatively quiet economic data-wise for the week ahead. PCE inflation for July in the US, due Friday, is the main release of note. Other US data include new home sales today, consumer confidence tomorrow, and a second estimate of Q2 GDP and jobless claims on Thursday.