FOMC ready for a September rate cut after minutes and weaker job growth

In focus today

August Flash PMIs are due for release today from the euro area, the UK and the US. July figures signaled weakening growth momentum especially in the euro area as the manufacturing index remains well in recession territory. We still forecast positive growth for all three economies during H2 and more upbeat PMIs could help alleviate markets' latest recession fears.

The annual Jackson Hole Economic Policy Symposium organized by the Kansas City Fed begins today and runs until Saturday. This year's theme is 'Reassessing the Effectiveness and Transmission of Monetary Policy'. Markets pay the closest attention to the Fed chair Powell's speech which is due at 16.00 CET.

In the euro area we get negotiated wage data for Q2. This is one of the important data releases for ECB before the September monetary policy meeting. Wage growth came in at 4.7% in Q1, and the June staff projections expected wage growth to remain broadly unchanged in Q2.

Early Friday, we receive Japanese inflation data for July. It will be interesting to gauge price pressures over the summer after June inflation was higher than expected following several months with modest price pressures. Tokyo data suggests inflation has moderated once again.

Economic and market news

What happened yesterday

From the US, we received the minutes of the latest FOMC meeting. Several participants said recent progress on inflation and increases in the unemployment rate provided a 'plausible case' for a 25-basis point rate cut at the July-meeting, or that they could have supported such a move. Most participants at Fed's meeting on 30-31 July said it would likely be appropriate to ease policy at the next meeting if data continued to come in as expected, minutes show. The minutes only further strengthen the expectation that we should see a 25 bp rate cut at the September meeting.

The payrolls revisions from the Bureau of Labor Statistics showed that the number of pay rolls was revised down by around 800,000 jobs from March 2023 to March 2024 meaning that jobs growth was way lower than what had been released previously.

Given the minutes and the payrolls revision a rate cut of 25bp by the Federal Reserve in September seems almost to be a done deal.

Market movements

Equities: Global equities were higher yesterday, led by Europe and the US, with the consumer discretionary sector leading the advance on both sides of the Atlantic. Energy stocks were once again found at the bottom of the performance range as oil prices continued to fall. For inflation bears, it is important to note that oil is down roughly 10% from last year, and the negative year-over-year effect will increase to 20% in the coming month if oil prices remain at current levels. Small caps made a significant comeback after their weak performance on Tuesday. In the US yesterday, Dow +0.1%, S&P 500 +0.4%, Nasdaq +0.6%, and Russell 2000 +1.3%. Asian markets are mixed this morning, with Japan continuing to regain some of its lost territory following the turmoil during the heavy carry trade unwind days. US and European futures are marginally lower.

FI: The combination of a downward revision of the US non-farm payroll numbers and the minutes showing that several members of the FOMC committee saw a case for a rate cut in July initially sent US bond yields lower yesterday. 10Y Treasuries declined some 6bp before rising 4bp at the end of the trading session yesterday. 2Y US Treasury yields dropped almost 10bp before rising 3-4bp.

Hence, a rate cut of 25bp by the Federal Reserve in September seems almost to be a done deal given the downward revision to the labour market data of some 800.000, which was the largest downward revision since 2009 as well as the comments in the minutes from the FOMC meeting.

FX: CHF and GBP gained yesterday, where USD and NOK lost ground. EUR/USD rose firmly above 1.11 after revision to job growth and the release of the FOMC minutes. After a strong start to the week, NOK reversed course yesterday. EUR/NOK rose above 11.70 again.