Twenty-two days of speculation, conjecture, rumour, and outright nonsense lie ahead for global financial markets after Federal Reserve Chair Jerome Powell hinted at potential interest rate cuts.
It's no longer solely about inflation; the Fed's primary concern is jobs. And watch as interest rate speculation eclipses all the hype surrounding Nvidia's upcoming quarterly earnings.
When a rate cut is imminent, traders' attention turns to the possibility of cheaper funding rather than expensive tech stocks.
Chairman Powell has stolen the spotlight from the megatech companies by doing what was widely expected: offering a strong hint of an impending rate cut in his highly anticipated speech at the start of the Kansas Fed's Jackson Hole seminar.
He played his part, just as he did two years ago when he warned markets about the impending "pain" associated with the central bank's inflation control efforts.
On Friday, he delivered a different message, but one connected to his 2022 warning, saying, "The time has come for policy to adjust."
"The direction is clear, and the timing and pace of rate cuts will depend on incoming data, the evolving outlook, and the balance of risks," he stated.
"My confidence has grown that inflation is on a sustainable path back to 2%," Powell added in his keynote speech.
He noted that inflation, as measured by the Fed's preferred PCE measure, had fallen to 2.5% from a peak of 7.1% two years ago. Measured by the more familiar consumer price index, inflation has dropped from a peak of 9.1% in mid-2022 to 2.9% last month. Both are inching closer to the Fed's 2% target.
So, as markets often do, they immediately bid up the size and number of potential cuts this year. No longer is 0.25% sufficient; half a percentage point is now the demand from the same people who warned that rate cuts could be dangerous and that inflation was proving "sticky."
It's now all aboard the rate cut express, also known as "bring back the sugar bowl."
There are three Fed meetings this year: September 17-18, November 6-7, and December 17-18. A flood of economists, analysts, and commentators are predicting rate cuts in two or even all three of these meetings.
As we approach the end of the month, the second estimate of June quarter GDP will be released. Any improvement on the annual 2.8% rate from the first estimate would strengthen the calls for a half-percentage point cut. Additionally, the Fed's favoured PCE spending, income, and price data will be released on Friday.
While these figures are important, the August jobs data on September 6 will be the most telling.
The Fed is concerned about the sharp decline in the number of new jobs in July (to 114,000) and the increase in the unemployment rate to 4.3% from 4.1% in June (even as wage growth fell to an annual 3.6%). This is seen as significant, especially considering the unemployment rate was 3.5% a year ago.
If the low July figure is confirmed, along with another low August figure and a steady or higher jobless rate, then a 0.5% rate cut is likely. However, if revisions boost the July figure and August is around 150,000 to 180,000, then a quarter of a percentage point cut might be more appropriate.
Powell also expressed optimism about achieving a soft landing, containing inflation without causing a recession. "There is good reason to think that the economy will get back to 2% inflation while maintaining a strong labour market," he said.
What impact did Powell's comments and the market reactions have on the greenback and bonds?
The US dollar index fell to its lowest level in 11 months on Friday at 100.68, declining 1.74% last week alone. This led the Australian dollar to rise 1.87% over the week, reaching its highest level since the start of 2024 at 67.97 US cents.
US bond yields dipped to 3.80% for the 10-year security, down 5 points for the day and 8 for the week. The yield on the two-year bond fell 5 points Friday to just over 3.92%, which is expected to be more reactive to Fed policy moves.
