Potential risk events pick up in the next few days as markets steady themselves after a strong rebound from the one-day volatility experienced on the first Monday of August. The dollar is selling off for a fifth straight week and hit fresh year-to-date lows on Tuesday as expectations of Fed rate cuts come into view, with a September move baked in. The key question is how big and fast will policy easing be, with a 25bps or 50bp cut on the table.
NFP Revisions and Fed Minutes
Today sees some provisional annual benchmark revisions to the US non-farm payrolls report and the release of the FOMC minutes from July. The former are released by the Bureau of Labor Statistics who use more accurate tax records, and it impacts the gains seen from April 2023 through March 2024. Goldman Sachs reckons 600,000 to 1 million fewer jobs were created. Fed Governor Cook cited figures that point to a downward revision of at least 600,000, while Governor Bowman pointed to employment gains that are about 110,000 per month lower than the currently reported gains in the data.
If this is accurate, the Fed might have seen the jobs market as overly tight during that period and perhaps might now be underestimating the amount of slack that is about to emerge as the economy cools. This prospect of a weaker labour market is why there is a decent chance (30%) of a 50bps September Fed rate cut. A very weak number could accelerate recession fears and spark risk-off market moves.
Later today, we get the FOMC minutes for the July meeting, when the Fed switched to re-emphasising its dual mandate of both maximum employment and price stability. These are likely to show that policymakers are increasingly comfortable with the inflation outlook, but less so with the employment picture. However, markets may look through the minutes as the views are somewhat outdated given the July jobs report was published after the meeting, as well as other important data.
Powell at Jackson Hole
Markets could also bypass the minutes as the main event of the week will be Fed Chair Jerome Powell speaking on the economic outlook at the Fed’s Jackson Hole symposium at 14.00 GMT. This is an annual gathering of central bankers, academics and policymakers which is often looked to for policy steer and updated assessments on the state of the US economy.
Last month, Powell said that if inflation and the labour market continued to cool, a rate cut may be appropriate at the September 18th FOMC meeting, and he is expected to reiterate this. The Fed Chair might also discuss the central bank’s dual mandate and the employment side, with perhaps emphasis now on preventing undesired weakness in the labour market. We note that the Fed’s definition of achieving a soft landing is bringing inflation back to target without requiring a deterioration in labour market conditions.
Powell will likely be asked about the size of the rate cut, and markets will be watching to see if he leans back on calls for the larger cut. When he was asked about this in July, Powell said it was not something the Fed was thinking about right now, but that was before the market volatility a few weeks ago. Ultimately, with mixed data since then, upcoming data releases will be key with the August jobs report, released on September 6, plus ISMs and CPI all crucial for the size of the cut.
Market Reaction
For the Fed meeting next month, money markets are currently pricing around 32bps of rate cuts. That essentially says a 25bps rate reduction is fully expected, with some incremental probability the Fed could go for a larger 50bps cut (roughly a 70/30% chance). The dovish pricing has been pared back in recent weeks as inflation continues to cool, and the labour market and consumer continue to look resilient amid its slowdown. Markets had been fully expecting a 50bps rate reduction a couple of weeks ago, when growth jitters stoked concerns the Fed may be behind the curve.
