• Fed chair Powell’s long-awaited speech in Jackson Hole highlights that the balance of risks between the Fed’s price stability and maximum employment goals appears to be shifting. With policy in restrictive territory, the baseline outlook and the shifting balance of risks may warrant adjusting the Fed’s policy stance. The Fed is puzzled by the current balance on the labour market which results from a marked slowing in both the supply and demand for workers. This unusual situation suggests that downside risks to employment are rising. And if those risks materialize, they can do so quickly in the form of sharply higher layoffs and rising unemployment.That’s a strong hint that the Fed is ready to pivot towards to a 25 bps rate cut at the September FOMC meeting. Markets have to repositioning again as latest PPI and PMI numbers argued in favour of a longer hold. The US yield curve bull steepens with yields dropping 8.5 bps (2-yr) to 3.7 bps (30-yr) in a first reaction. Loss of USD interest rate support propels EUR/USD from 1.16 to 1.1670. US equity markets rally up to 1.5%.
• Looking forward to next week, European trading will be thin on Monday with UK markets closed for Summer Bank holiday. The Belgian debt agency nevertheless auctions three OLO lines (OLO 97 3% Jun2033, OLO 100 2.85% Oct2034 and OLO 101 3.5% Jun2055). So far, the debt agency raised €35.15bn via syndications and auctions compared to a €47bn OLO funding need. German Ifo Business sentiment will be published as well, but the outcome is normally in line with this week’s PMI release. The German composite PMI improved marginally (50.9 from 50.6) on the back of an improvement in the manufacturing sector (49.9 from 49.1). US eco data are plenty, but second tier, on Tuesday with July durable goods orders, Richmond Fed manufacturing index, consumer confidence and housing prices. Especially the latter two will be watched though could give conflicting signal (for the Fed). One might point in the direction of rising inflation expectations, the other to a further cooling of the US housing market. The US Treasury starts its mid-month refinancing operation the same day with a $69bn 2-yr Note auction. $70bn 5-yr Note and $44bn 7-yr Note sales follow on Wednesday and on Thursday. These shorter tenors draw less market attention than the longer (end-of-month) sales of 10-yr and 30-yr Notes/Bonds. Wednesday risks being uneventful in absence of eco data with Minutes of the July ECB decision the highlight on Thursday. Bloomberg today runs an article that the ECB is increasingly convinced that they can keep interest rates unchanged in September with growth and inflation developing largely in line with June projections. An “insurance” rate cut to cover the downside of the risk balance risks backfiring if associated with speculation about deteriorating prospects and is therefore off the table. Q2 EMU negotiated wage data today also showed an uncomfortable acceleration from 2.5% Y/Y to 4% Y/Y, pointing at sticky services inflation. EMU money markets keep repositioning away from a more dovish ECB scenario, with the probability of another 25 bps before year-end currently only at 36%. Inflation is the focal point on Friday with Germany, France, Spain and Italy reporting August CPI numbers, the ECB publishing its consumer inflation expectations and July US PCE deflators due. The Fed’s preferred inflation measure risks showing stronger inflationary dynamics than the July CPI number given certain components from the July producer prices report (+0.9% M/M; highest since March2022) feeding into PCE (eg 1% M/M increase in Airline passenger services or 5.8% M/M higher portfolio management costs).
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