Jerome Powell indicated that the Federal Reserve would begin cutting rates in September, although some uncertainty surrounds the magnitude and pace of rate cuts.
In contrast, the RBA, ECB, and Bank of Japan struck a more hawkish tone, putting further downward pressure on the US dollar.
The latest flash PMIs indicated positive but fragile growth, supporting the central bank outlooks.
This week's data highlights include the US PCE inflation data, the monthly Australian, Eurozone and Tokyo CPI figures, Chinese interest rates, and the official Chinese PMIs. Reporting season will continue in Australia, and Nvidia earnings will be released on Wednesday.
Kamala Harris accepted the nomination for the presidential election at the Democratic Party convention in Chicago last week, taking a slight +3.6% lead in the latest polls surveyed by the website fivethirtyeight.com. RFK Junior then suspended his campaign and threw his support behind Donald Trump. However, the show was largely ignored by investors, who instead focused on the week’s central bank action.
At the Kansas City Federal Reserve’s annual symposium in Jackson Hole Wyoming, Fed Chair Jerome Powell could not have given a clearer indication that the FOMC will soon cut interest rates. He began by suggesting that the Fed’s inflation condition had been met, before highlighting the growing risks of higher unemployment. He said, “After a pause earlier this year, progress toward our 2 percent objective has resumed. My confidence has grown that inflation is on a sustainable path back to 2 percent [...]
Overall, the economy continues to grow at a solid pace. But the inflation and labour market data show an evolving situation. The upside risks to inflation have diminished. And the downside risks to employment have increased. As we highlighted in our last FOMC statement, we are attentive to the risks to both sides of our dual mandate.
The time has come for policy to adjust. The direction of travel is clear, and the timing and pace of rate cuts will depend on incoming data, the evolving outlook, and the balance of risks”.
Earlier in the week, the FOMC minutes had also said that the “vast majority” of members expected a September cut. The only question is whether the FOMC will begin cutting the Federal Funds rate by -0.25% or -0.50%. Market pricing is somewhere in between, with the effective rate expected to drop to 5.0% from the current 5.25% - 5.50% range on September 18th.
By then, committee members will see more employment and inflation data. Last week, the Bureau of Labor Statistics revised the number of payrolls added to the economy over the twelve months ending March 2024 by -818k. The huge downward adjustment was not a total surprise, being in line with the previously released Quarterly Census of Employment and Wages. Nevertheless, when the unemployment rate is adjusted in early February next year, it could add another +0.5% to unemployment, implying that the current actual unemployment rate could be as high as 4.8%. At the same time, this Friday’s annual core PCE inflation figure, the Fed’s preferred measure, is expected to rise from +2.6% to +2.7%. However, the monthly rate is forecast to increase by just +0.2%, bringing the last three months' annual rate to +2.1%, very close to the 2% target.
Besides the adjusted employment figures, last week’s main data points were the latest global flash PMIs, which supported the Federal Reserve’s outlook.
Chris Williamson, Chief Business Economist at S&P Global Market Intelligence said, “The solid [American] growth picture in August points to robust GDP growth in excess of 2% annualised in the third quarter, which should help allay near-term recession fears. Similarly, the fall in selling price inflation to a level close to the pre-pandemic average signals a ‘normalisation’ of inflation and adds to the case for lower interest rates.
“This ‘soft-landing’ scenario looks less convincing, however, when you scratch beneath the surface of the headline numbers. Growth has become increasingly dependent on the service sector as manufacturing, which often leads the economic cycle, has fallen into decline. The manufacturing sector’s forward-looking orders-to-inventory ratio has fallen to one of the lowest levels since the global financial crisis.
“At the same time, service sector growth is constrained by hiring difficulties, which continue to push up pay rates and means overall input cost inflation remains elevated by historical standards.
“The policy picture is therefore complicated, and hence it’s easy to see why policymakers are taking a cautious approach to cutting interest rates. However, on balance the key takeaways from the survey are that inflation is continuing to slowly return to normal levels and that the economy is at risk of slowing amid imbalances.”
The US dollar weakened against the major currencies, including by -1.9% against the Australian dollar. The RBA’s August minutes stated, “Members assessed that the risk of inflation not returning to target within a reasonable timeframe had increased. This reflected the slow pace of disinflation over the preceding year, the staff’s judgement that the gap between aggregate demand and supply was larger than previously assessed, and the upward revision to the forecast for final demand”. The minutes further confirmed the governor’s recent comments that the market was overestimating the Board’s willingness to cut rates in 2024.
Warren Hogan, Chief Economic Advisor at Judo Bank said that the Australian flash PMI report “highlights the continued inflation risks in the economy with activity improving, presumably on the back of the tax cuts that commenced in July and business costs pressures rising, the certainty with which financial markets are pricing the next move in the RBA’s cash rate as a cut, remains perplexing. There is nothing in these results that allows us to reduce the probability that the RBA may still have to raise the cash rate further before a concerted easing cycle can begin.”
The Wisetech share price jumped by +28.2% last week after a strong earnings report. However, the broader set of 162 / 282 results compiled by Bloomberg are more consistent with the PMI, indicating that S&P/ASX300 profits have been squeezed -3.2% lower than a year ago.
The Japanese yen also strengthened last week, rising by +2.2% against the US dollar after an upside surprise in July CPI inflation, which remained at +2.8% yoy for the third consecutive month. According to Bloomberg, Bank of Japan Governor Kazuo Ueda “said the BOJ’s stance hadn’t changed, provided inflation and economic data continue in line with its forecasts. The comments come after his deputy had sought to reassure investors that further hikes would also depend on the state of the market, after the central bank’s increase in July trigger a massive selloff in global equities”.
The Japanese PMI was one of the more upbeat reports, indicating a pick-up in manufacturing activity. At the same time, the Eurozone PMI suggested that the “underlying fundamentals might be shakier than they appear” with much of the improvement attributed to the uptick in French services activity as a result of the Paris Olympics. Nevertheless, speaking at Jackson Hole, the ECB’s chief economist cautioned, “The return to [the 2%] target is not yet secure. The monetary stance will have to remain in restrictive territory for as long as needed to shepherd the disinflation process towards a timely return to the target.”
More inflation data will be released this week, with the Australian monthly CPI figures due on Wednesday, before the US, Eurozone and Tokyo figures are published on Friday. There will also be Australian retail sales and a Chinese rate decision before the official Chinese PMIs are published this weekend. Australian reporting season is set to continue, while global equity investors eagerly await the Nvidia results scheduled for Wednesday.
Significant Upcoming Data:
| Monday | Tuesday | Wednesday | Thursday | Friday |
Australia |
|
| Monthly CPI; Construction Work Done | Private Capex | Retail Sales; Private Sector Credit |
US | Durable Goods Orders; Dallas Fed. Mfg. Activity
| Conf. Board Cons. Conf.; Richmond Fed. Mfg. Index & Bus. Cond.; FHFA & S&P CoreLogic House Prices
| MBA Mortgage Apps.
| Wsale & Ret. Inventories; Adv. Goods Trade; Pending Home Sales; Q2 GDP (2nd Est.); Weekly Jobless Claims
| PCE Inflation; Pers. Income & Spending; MNI Chicago PMI; UMich. Cons. Sent.
|
Europe | IFO Survey; Spanish & Finnish PPI; Belgian Bus. Conf.; Norwegian Unempl. Trend
| Swedish PPI; Danish Ret. Sales; German Q2 GDP (Final); Finnish Bus. & Cons. Conf.
| EZ M3 Money Supply; German Gfk, French & Irish Cons. Conf.; Italian Ind. Sales; Danish Ret. Sales; Swedish Trade; Finnish Trade & House Prices; Unicredit Bank Austria Mfg. PMI
| EZ & Swedish Cons. Conf.; EZ, Serv. Ind. & Econ. Conf.; Swedish Q2 GDP, Ret. Sales, Mfg. Conf. & Cons. Conf.; German, Spanish & Belgian CPI; Irish PPI; EU27 New Car Reg. | EZ, French, Italian, Dutch & Austrian CPI; EZ, German, Italian, Belgian, Danish & Norwegian Unempl.; German, Spanish, Irish & Finnish Ret. Sales; Swiss KOF Leading Ind.; UK M4 Money Supply; Spanish Curr. Acc.; French PPI, Cons. Spending & Payrolls; Italian Mfg. Conf.& Econ. Sent.; Swedish Wages; French (Final), Finnish, & Belgian (Final) Q2 GDP; Belgian Q2 GDP (Final); UK Nationwide House Prices
|
Japan | Leading & Coinc. Indices | PPI Services |
| Consumer Conf. | Jobless Rate; Job-to-Appl.; Tokyo CPI; Ind. Prod.; Retail Sales; Housing Starts
|
China | 1yr Med. Term Lending Rates | Industrial Profits |
|
| [Official PMIs] |
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