It’s a new month, a return from the holiday period and the first Friday of September. That means the usual monthly US employment report which will garner even more attention than usual. As Fed Chair Powell said at his recent speech at Jackson Hole, the “time has come for policy to adjust” and that the timing of rate cuts “will depend on incoming data”. He also placed extra emphasis on the labour market, saying that policymakers would “not seek or welcome further cooling in labour market conditions.”
This all points to the headline and unemployment prints being crucial for the size of the incoming September rate reduction. Bets are currently 70/30 on a 25/50 bps move. Another weak report will hit the dollar and may hurt stock markets which have enjoyed an impressive few weeks of strength. Fresh record highs could prove tricky if the data rekindles recession fears. But weather-related issues around the July numbers might see a bounce back in the labour market, boosting the soft landing theme.
The Bank of Canada meeting will bring another quarter-point rate cut, with money markets pricing in two more similar moves in October and December. This straight-line trajectory of what would be five consecutive rate cuts into year-end, plus a similar path in 2025 implies near perfection in the delivery of aggressive rate cuts. Is that too perfect? USD/CAD has found support just below 1.35 as the loonie has appreciated due to broader FX moves and the soft August for the dollar. This move could put a squeeze on the big build up of CAD short positioning that developed through the middle of the year, just as CAD troughed.