Friday Aug 23 2024 13:54
5 min
I mentioned bread and circuses in a note earlier this week. I note BofA has the same idea with its Flow Show this morning. “Fed and Circuses: 5 of 6 Powell Jackson Hole speeches saw the S&P 500 drop 7.5% on average in the next 3 months. Who’s left to buy? GWIM private client allocation at 62%, and S&P 500 corporate cash just 8.8% of assets, often a bearish tip-off".
All eyes are on Powell’s speech today. Does he lean in to a 50 basis point (bps) interest rate cut in September? Powell previously said this wasn’t even discussed at the Federal Reserve's July meeting. But things have changed a bit since — even if the stock market has recovered its legs after a major wobble.
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Economist Jason Furman thinks the BLS revisions mean zilch. I would disagree with such a blanket put-down of the changes. BLS figures for the labour market showed sharply lower jobs growth, with an adjustment to March 2024 total nonfarm employment of -818,000 (-0.5%). That was a steep correction considering the average of the last 10 years is about -0.1%.
The jobs market is softening — and it is doing so from a weaker position than everyone thought. It’s not that rear-looking data really matters. And if the jobs market was improving, it would not matter.
After Powell, we look to Labor Day unclenching. September 6th sees the August jobs report. If unemployment ticks up to 4.4% or 4.5% we could see the market reprice for a 50bps cut in September, which would tend to drag on the front end of the yield curve and hit USD.
So I think Powell today has an easy job (in a way) – cut in September but keep the options open. But he could say more – JH has often been used as a policy pivot. The next jobs report is key to it all. BofA notes that lower bond yields are the weak macro tell and cite “rising hard landing risk in Q4”.
Anyway — what does it matter when the US government is chalking up $1 trillion in additional deficit every 100 days and the next president, whoever they may be, is highly likely to cook up a hell of a lot more?
Meanwhile, it looks like the European Central Bank is about to cut again next month. PMI data for Germany’s manufacturing sector was predictably bad, down to 42.1 from 43.2. France’s service sector shot the lights out. But this was hardly a surprise.
And then there was further news that could support the ECB with more easing sooner rather than later. Growth in negotiated wages slowed to 3.55% in the second quarter from 4.74% three months earlier, thanks mainly to a slowdown in Germany.
The ECB has long stressed how important the negotiated wage data is to its policy outlook. Yesterday’s ECB meeting accounts showed policymakers had left a wide-open door to another cut in September but required more data. They were mindful about expectations for wage growth to slow – the above data suggests they needn’t worry.
I feel that the combination of increasingly weak manufacturing PMI data from France and Germany, combined with slowing wage growth, provides the scope to cut by 25bps again. The wage data is enough evidence that compensation is heading in the right direction.
On the flip side, the Japanese yen has rallied somewhat after BoJ’s Ueda struck a hawkish tone overnight. He stressed that short term rates are too low and need to raised to neutral. Inflation though was a bit soft, cooling the yen bulls somewhat.
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