The Jackson Hole Symposium is underway in Wyoming, with Jay Powell’s speech later the highlight. 

The theme for the gathering this year is “Reassessing the Effectiveness and Transmission of Monetary Policy.”
– What does this mean? For me, they are acknowledging the asymmetry of monetary policy moves (more immediate impact going down than up), which is going to matter on the exit from peak rates.
– But all markets care about is September and whether the Fed is going to carry out 100bps of cuts this year, which puts chairman Powell’s speech in focus 

It seems a given now that the Federal Reserve will cut interest rates next month. This, to be fair, has been well understood by markets for a fair while. But minutes from the Fed’s last meeting in July confirmed the “vast majority” of policymakers are behind cutting in September. Meanwhile the US labour market may not be in such great shape as thought. 

The FOMC believes that “if the data continued to come in about as expected, it would likely be appropriate to ease policy at the next meeting”. The minutes also noted how “many” Fed officials viewed the stance of rates to be restrictive and “a few participants” backed a cut in July. 

We’ve escaped the major recessionary fear phase of early August. This makes it less pressing for the Fed to go big with 50bps in September. But the data is not shooting the lights out: mfg PMI fell to an 8-month low. And then there are the jobs. 

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%. 

Jason Furman thinks the BLS revisions mean zilch. I would disagree with such a blanket put down of the changes. 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 matter not a jot. But the labour market is softening and doing so from a weaker position than had been baked into assumptions.  

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, the belief is a cut coming next month and perhaps as much as 100bps of cuts expected by the end of the year. Jay Powell should confirm the first part of this (Sep cut), but he’s hardly going to nail his colours to the mast with the second part (100bps of cuts this year). He can wait until September 6th for the jobs report. 

Meanwhile, it looks like the ECB 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.  

Chart source 

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. 

Neil Wilson

Chief Market Analyst at Finalto

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