Is the market giving too much weight to Powell’s remarks tomorrow at Jackson Hole?

Outlook

Today we get the usual weekly jobless claims and existing home sales (a possible gain for the first time in half a year).

The Fed minutes are interpreted to confirm the Sept rate cut. To call it an “easing cycle” is probably correct but also premature.

The payrolls revision by 818,000 is the largest since 2009 but at the same time, job growth is strong, historically. One aspect of the report to be contemplated is the drop in hours worked means productivity has to be higher—and unit labor costs have to be lower. If workers collectively made a lot less money than we thought, why didn’t retail sales fall? Well, remember, the revision ends in March and many still had savings from the Covid handout. 

One thing that is all too apparent today is the ragged response to macro data. Canada has a country-wide rail strike but the CAD continues firm. The UK has an okay PMI and it drives the pound up. Australia has a really good PMI but the AUD is falling. Germany has a dreadful PMI and the euro is dipping but not in danger of a correction so far.

Forecast: The FX market always overshoots. It seems obvious that the euro and other currencies are now overshooting to the upside and poised for a retreat. Our canary in the goldmine on these occasions is the Australian dollar, although charges due to relations with China in the last decades could have changed that. In any case, the AUD put in a doji on the daily chart yesterday, meaning uncertainty.

We continue to think the market is giving far too much weight to Powell’s remarks tomorrow at Jackson Hole. He may confirm the Sept cut but it’s very doubtful he will confirm multiple cuts. 

It’s not clear that disappointment will change anyone’s mind about a series of rate cuts but as doubt seeps in, watch out for it to become a flood. We wonder if the Fed will do only two cuts this year, not three, out of a surplus of caution. 

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