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Key Events and Data to Watch This Week [26 August - 30 August 2024]

Rate Cut Speculation Rises as Powell Signals Fed’s Labor Market Focus


Last week, all markets were focused on Federal Reserve (Fed) Chairman Jerome Powell’s speech at Jackson Hole. Powell's speech was critical because it provided the clearest indication yet of the Fed's shift in focus from ensuring price stability to strengthening the labor market.


Powell hinted at upcoming rate cuts by stating that it is time to adjust monetary policy and expressed growing confidence that inflation will reach the target rate.


He also emphasized that they would do everything necessary to support a strong labor market, noting that the current policy rate provides sufficient room to respond to any risks, including the risk of further unwanted weakening in the labor market.


Powell adopted a dovish tone as the markets had hoped but did not comment on the pace or extent of the cuts, stating that these would be determined based on upcoming data. However, some economists interpreted the lack of mention of "gradual" rate cuts as a sign that a 50-basis-point rate cut in September is still on the table. Before Powell’s speech, the probability of a 50-basis-point rate cut at the September meeting was priced at 26.5%, but this has risen to 38.5%.



The employment data to be released before the September 18 meeting could be decisive in determining whether the rate cut will be 25 or 50 basis points. Economists believe that if the August non-farm payroll report, to be released next week, shows an increase of less than 100K, the need for a 50-basis-point rate cut will grow.


Economists surveyed by Bloomberg expect the U.S. unemployment rate to rise to 4.4% by the end of the year, which they believe will lead the Fed to make a more extensive rate cut. Atlanta Fed President Raphael Bostic supported this market view by stating that "we have to move bigger if unemployment rises further."


Fed officials will receive two more inflation and one employment report before the September 18 policy meeting. This Friday, the Fed's preferred inflation gauge, the Personal Consumption Expenditures price index, will be the first inflation report released before the meeting.


Additionally, the preliminary reading of the second quarter Gross Domestic Product, set to be released on Thursday, could be significant in illustrating the impact of high interest rates on economic activity and may influence expectations.



Central Banks Adjust Priorities Amid Economic Risks


In addition to the Fed, it seems that for other major central banks, weaknesses in the labor market and growth risks have begun to replace inflation as the primary threat.


The Jackson Hole symposium was also significant for the signals given by European Central Bank (ECB) officials. The key takeaway from the statements made by ECB officials who attended the symposium was the growing concern about economic growth.



Finnish Central Bank Governor Olli Rehn stated that the growth outlook for the Eurozone, particularly in the manufacturing sector, is quite stagnant, which strengthens the case for a rate cut in September.


If inflation remains in line with the ECB's projections, two more rate cuts are expected this year. The consumer price index to be released this week could be decisive for rate cut expectations.



Market Reactions: Powell's Speech and Middle East Conflicts Impact Yields and Commodities


As bets on the extent of the Fed’s expected rate cuts this year increase, the decline in U.S. Treasury yields is deepening.


Following Chairman Powell’s speech on Friday, markets began pricing in the possibility that the Fed may need to implement larger rate cuts to achieve a soft landing scenario. This led to a drop in U.S. 2-year Treasury yields to 3.88% and the 10-year benchmark yield to 3.78%.


The decline in yields is providing a tailwind for non-yielding precious metals. GOLD, after pulling back from its all-time high, has risen again above the $2,500 per ounce.


GOLD has increased by more than 20% this year, continuing to be one of the best-performing assets. In addition to expectations of Fed rate cuts, uncertainty surrounding the upcoming U.S. presidential election and rising geopolitical risks are also supporting the yellow metal’s rally.


On the other hand, markets closely monitored the rising tensions in the Middle East over the weekend. After Iran began to respond to the killing of its military leaders by Israel, Israel’s counter-response was swift. Following a preemptive strike by Israel on Hezbollah facilities in Lebanon, a 48-hour state of emergency was declared.




The mutual attacks that took place on Sunday have heightened fears that the nearly 10-month-long conflict between Israel and Hezbollah could escalate into a full-scale war.


The rising tensions in the Middle East, which supplies about one-third of the world’s crude oil, support the upward momentum in oil prices. However, the impact of these tensions is now more limited; analysts note that markets are becoming increasingly immune to the nearly year-long conflict, and concerns about potential disruptions to oil supply are not as heightened as before. Additionally, ongoing ceasefire negotiations may be acting as a limiting factor on the upward momentum in oil prices.



RBA Hawkishness Under Scrutiny as Bond Yields Slide


The Reserve Bank of Australia’s (RBA) hawkish stance is struggling to convince the markets. During this month’s monetary policy meeting, the RBA kept interest rates at a 12-year high, signaling that a rate cut is not on the horizon. However, markets are predicting that the bank will not be able to maintain high rates, especially after the Fed starts cutting rates.


The sharp decline in Australian bond yields highlights how unconvinced the markets are by the RBA’s hawkish stance. The yield on Australia’s 2-year bonds dropped from 3.61% on Friday to 3.52%, while the benchmark 10-year yield fell to 3.88%. This is acting as a headwind to the Australian dollar’s rise against the U.S. dollar.


This week, markets will be watching both U.S. data and upcoming data from Australia. The Australian Consumer Price Index, set to be released on Wednesday, is expected to show a decrease in price pressures. After a 3.8% increase in the previous month, the index is anticipated to rise by 3.4% in July. This could strengthen bets on a potential rate cut from the RBA and increase pressure on the AUD.

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