Labor Market Data in Focus as Jackson Hole Symposium Approaches
One of the world’s most significant annual economic forums, the Jackson Hole Symposium, will be held from August 22 to 24. It will bring together central bank officials.
All eyes in the markets are on Federal Reserve Chair Jerome Powell’s opening speech at the symposium. Traders are nearly certain that the Fed will begin rate cuts at its September meeting, and they will be looking for clues in Powell’s speech regarding the depth of these cuts.
Similarly, the Fed’s July monetary policy meeting minutes, which will be released early Thursday, could shape rate-cut expectations.
The latest data from the U.S. shows that inflation continues to ease and confirms a cooling in the labor market. Following the subsiding recession fears caused by the non-farm payrolls report released on the first Friday of the month, expectations for aggressive rate cuts have ended. Markets are now pricing in a 75 to 100 basis point cut by the Fed this year. However, developments this week could reshape these expectations.
The downward trend in price pressures in the U.S. has led to a greater focus on labor market developments. In this context, today’s revised figures to be released by the U.S. Bureau of Labor Statistics will be critical.
The markets expect the report to reveal that the U.S. economy has created fewer jobs than previously reported. What the report shows could influence the tone of Chair Powell’s speech on Friday.
Gold Surges to Record High Amid Falling Yields and Geopolitical Tensions
U.S. Treasury yields continue to decline amid expectations that the Fed will cut rates for the first time in over four years.
Ahead of Powell’s speech, expectations of downward revisions in payroll data have pushed the U.S. dollar to its lowest levels of the year against a range of currencies. U.S. Treasury yields are also at their lowest levels since 2023.
The 2-year Treasury yield stands at 4.00%, while the benchmark 10-year yield is at 3.81%. Both are close to the lows seen earlier this month following the release of non-farm payrolls data.
Moreover, the yield drop continues to act as a tailwind for precious metals. GOLD surged above $2,530 per ounce yesterday, setting a new all-time high.
Gold traders seem to be waiting and waiting, holding off on placing new bets until they gather clues from upcoming reports and Powell’s speech.
On the other hand, the rally in gold is also driven by ongoing geopolitical tensions, uncertainties surrounding the upcoming U.S. presidential elections, and speculation about Chinese demand. As a result, even if Powell’s message doesn’t fully align with market expectations, these other factors could limit pullbacks in gold prices.
Ueda’s Upcoming Speech Key to Yen’s Direction as BoJ Mulls Further Hikes
The Bank of Japan’s (BoJ) hawkish shift during its July 31st monetary policy meeting, following the yen’s drop to its lowest level in 38 years, caused turbulence in global markets. BoJ Governor Kazuo Ueda's indication of the possibility of further rate hikes led to the unwinding of nearly three-quarters of carry trade positions.
However, shortly after Ueda's hawkish signals, BoJ Deputy Governor Shinichi Uchida stated that no new rate hikes would be implemented if financial market instability persisted. This statement muddied market participants' expectations regarding the BoJ's policy direction.
According to a Bloomberg report, Japanese retail investors have begun gradually returning to carry trade positions in high-yield currencies like the Mexican peso and Turkish lira amid signs that the yen’s rally has stalled. As of earlier this week, the yen's net short positions had rebounded to levels seen on August 2nd. Although this recovery has been slow, it could be a limiting factor for further strengthening the yen against the U.S. dollar.
On the other hand, the possibility of another rate hike by the BoJ later this year remains on the table. Market participants do not expect any changes during the September 20th monetary policy meeting, but most economists anticipate another hike either later this year or in January.
Additionally, a paper published by BoJ economists yesterday highlighted that inflationary pressure in Japan continues. The paper also noted that labour shortages exert upward pressure on wages and alter businesses' pricing behaviour. While this research does not reflect the BoJ's official stance, it could influence market expectations regarding the likelihood of a rate hike.
Japan's National Consumer Price Index (CPI) data will be closely watched on Friday. The core CPI, which rose by 2.6% last month, is expected to increase by 2.7% year-over-year in July.
Following the release of the data, BoJ Governor Ueda will address parliament to explain the rationale behind the recent rate hike and the inflation outlook.
The yen could rise if Ueda reiterates his earlier signals for further rate hikes. Moreover, a hawkish signal from the BoJ will likely provide additional support to other Asian currencies.
Potential Fed Rate Cuts May Open Door for Further PBoC Action
The People's Bank of China (PBoC) announced yesterday (Tuesday) that the one-year loan prime rate remained steady at 3.35%, while the five-year rate, which serves as the benchmark for long-term loans, including mortgages, remained unchanged at 3.85%.
The PBoC’s decision aligned with market expectations; economists believed it was too early for another rate cut following last month’s surprise reduction. The country's economy's performance in the third quarter will be closely monitored for any potential new policy moves by the PBoC.
Bloomberg economist Eric Zhu suggests that the Federal Reserve's anticipated rate cut in September could open the next window for the PBoC to lower rates further. As the Fed begins to reduce interest rates, the interest rate differential between Asian currencies and the US will narrow. This could give the PBoC more room to cut rates and support the domestic economy. Moreover, Standard Chartered Bank economist Becky Liu underscores that the possibility of a reserve requirement ratio (RRR) cut in the third quarter remains in play.
On the other hand, the Chinese government continues to roll out a series of bailout packages to address the economic slowdown and the crisis in the real estate sector. According to a Bloomberg report, local governments can issue special bonds to purchase unsold homes.
However, measures taken in the real estate sector have been ineffective. One reason cited is that returns on housing investments are falling below financing costs. Given the challenges in implementing bailout packages and the ongoing structural issues, there is doubt that the fundamental outlook for the real estate sector will change in the short term.
Moreover, as the expected rate cuts from the Fed continue to be priced in, the Asian Dollar Index is hovering around its highest levels since 2022. The yuan has recently recovered much of its losses against the dollar throughout the year.
Nevertheless, China heavily relies on exports for its economic recovery. Therefore, a stronger yuan could negatively impact the country’s exporters. Especially considering the new tariffs imposed by Western countries on Chinese products, Chinese exporters may be under dual pressure.