Fed Signals Time Has Come for Rate Cuts

For the week ending 23 August 2024

As of midday Friday, global equities were firmer on the week in the wake of comments from US Federal Reserve Chair Jerome Powell that “the time has come for policy to adjust,” a signal that the Fed will initiate an easing cycle at its next meeting in September. The yield on the US 10-year Treasury note fell to 3.80%, having fallen as low as 3.76% on Wednesday afternoon. The price of a barrel of West Texas Intermediate crude oil declined $2 to $74.50 while volatility, as measured by futures contracts on the Cboe Volatility Index (VIX), was little changed from a week ago at 16.?

MACRO NEWS

Powell: The time has come for policy to adjust

Fed Chair Jerome Powell set the stage for a series of interest rates cuts in his annual address at Jackson Hole, Wyoming. The direction of travel is clear, he said, and the timing and pace of rate cuts will depend on incoming data, the evolving outlook and the balance of risks. The Fed doesn’t seek or welcome further cooling in labor market conditions, Powell said, while noting his confidence has grown that inflation is on a sustainable path to 2%. Bond yields fell after Powell’s remarks, and equities rose, while short-term rate markets were little changed, having priced in nearly 100 basis points in cuts before the end of the year, suggesting that markets anticipate further weakening in the labor market.?

FOMC minutes pave way for September rate cut

The minutes of the July meeting of the Federal Open Market Committee, released Wednesday, helped set the stage for Powell’s strong signal on Friday that the time has come to cut rates. The minutes showed that the vast majority of Fed officials saw a September rate cut as appropriate and several saw a case for cutting in July. Almost all expected continued disinflation while some saw a risk of a more serious deterioration in the labor market. The meeting took place before the short-lived bout of market turmoil in early August, and the minutes didn’t hint at an initial cut of larger than 0.25%.?

Benchmark revisions show less US job growth?

Preliminary data from the Bureau of Labor Statistics show that the US produced 818,000 fewer jobs than expected over the 12-months ending in March. That’s an average of about 68,000 fewer jobs a month and suggests that the labor market is less tight than thought. The softer employment picture will likely prompt the Fed to balance concerns over the labor market with its battle against inflation. The downward revision was the largest since 2009. However, after the revisions, the monthly average growth in payrolls was a still-solid 175,000.?

Harris tax policies in focus

Budgets proposed by presidents are rarely enacted into law, but they serve as a blueprint of an administration’s policy preferences. Thus some investors were taken aback when US Vice President Kamala Harris’ campaign this week reiterated her support for President Joe Biden’s most recent budget proposal, which included a minimum tax of 25% on unrealized capital gains for those with wealth greater than $100 million. Critics charge that such a tax would discourage investment and inhibit innovation. The March budget proposal also included an increase in the top marginal rate on long-term capital gains and qualified dividends, to 44.6%. Harris accepted the Democratic Party’s nomination for president on Thursday night in Chicago, vowing to expand economic mobility for the middle class if elected.?

QUICK HITS

Chinese authorities have restricted a key source of data on inward investment as global funds continue to pull money out of the country’s stock market, threatening to make 2024 the first year of equity outflows, the Financial Times reported this week. As of Monday, daily data showing net investment flows from foreign funds into stocks in mainland China are no longer available.?

More than half of the biggest companies in the US see artificial intelligence as a potential risk to their business, while less than a third see it as an opportunity, according to Arize AI. Arize’s study showed that 281 Fortune 500 companies cited AI as a risk factor in their latest annual reports.

After healthy US retail sales data last week, Goldman Sachs lowered its odds of a US recession to 20% from 25%. The latest data show no signs of recession, Chief Economist Jan Hatzius said. He added that a solid August jobs report would lower the odds to 15%.

The Conference Board’s Leading Economic Indicator fell 0.6% in July, but the weakness was concentrated in manufacturing and construction, which make up a comparatively small part of US economic activity.

US existing home sales rose 1.3% in July, the first increase since February. The national median existing-home price in July was $422,600, a 4.2% increase from a year earlier?and just below June’s record high, the National Association of Realtors reported. New home sales rose 10.6% last month amid lower mortgage rates.

Sweden’s Riksbank this week cut rates for the second time since May and indicated additional cuts are likely. It trimmed its policy rate 0.25%, to 3.5%.

In an interview with Bloomberg on Monday, former President Donald Trump said “it’s fine” for a president to talk about monetary policy since the Fed doesn’t have to listen. Trump ignited controversy several weeks ago by saying presidents should have “a say” in monetary policy decisions.?

On Tuesday, a federal judge in Texas invalidated the US Federal Trade Commission’s ban on noncompete clauses in employment contracts. The prohibition was set to come into effect next month.

Independent candidate for US president Robert F. Kennedy, Jr. is said to be planning on ending his campaign this week and endorsing Donald Trump.

A labor dispute shut down operations on Canada’s two main freight railways on Thursday, raising concerns that North American supply chains will be disrupted. However, late Thursday afternoon, the Canadian government forced the two sides into binding arbitration in an effort to end the dispute. ?

Negotiated wage gains in the eurozone slowed to 3.6% in Q2, down from 4.7% in Q1, increasing the odds that the European Central Bank will cut rates further in September.

Bank of Japan Governor Kazuo Ueda told a parliamentary hearing that the central bank will continue to “adjust the degree of easing” (hike interest rates) if it the economy and prices stay in line with forecasts, though he said the BOJ sees no rush to hike rates and that it is carefully watching financial markets.

S&P Global released preliminary August purchasing managers’ indices on Thursday: The eurozone services reading was turbocharged by the Paris Olympics.?

THE WEEK AHEAD

Highlights of next week’s economic calendar include US durable goods orders on Monday, Australian CPI on Wednesday and the first revision of Q2 US GDP on Thursday. On Friday, eurozone CPI will be released, as will Canadian GDP and US core PCE. Perhaps the most impactful event of the week will be Wednesday’s Q2 earnings announcement from NVIDIA.

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Sources:?MFS research, Wall Street Journal, Financial Times, Reuters, Bloomberg News, FactSet Research, CNBC.com.