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The Fed’s Chairman says, ‘The time has come’.
"The time has come for policy to adjust" the head of America's central bank said, an unmistakable signal that interest rates were set to start being reduced.
In remarks prepared for a speech at the Jackson Hole Economic Symposium, Jerome Powell added: "We do not seek or welcome further cooling in labour market conditions."
"The direction of travel is clear, and the timing and pace of rate cuts will depend on incoming data, the evolving outlook, and the balance of risks."
Economists said that Powell's remarks did not give much away as to the tempo of rate cuts after September, although market chatter was that the door was open to a possible half-percentage point cut.
However, this seems less likely than a 25 basis point (0.25%) cut. The Fed will be the last to cut behind the European Central Bank and the Bank of England and some think they have left it too late - however, a month or two really shouldn’t make too much difference at this point.
If the cutting begins next month for the world’s largest economy and continues until rates normalise around 3.5% - 4.25% then hopefully a recession will be averted and the economy can continue along its current path.
This announcement gave a boost to stocks as the Dow Jones Industrial Average and S&P 500 Indices moved back toward record highs. The gains were also broad-based, with small-caps outperforming large-caps and an equal-weighted version of the S&P 500 Index outpacing its capitalization-weighted counterpart.
The release of minutes from the Fed’s previous policy meeting earlier in the week also seemed to bolster sentiment, according to our traders. A “vast majority” of participants saw a September cut as “likely appropriate,” while “several” had even seen the case for cutting in July amid growing confidence in the recent disinflation and the labour market coming into better balance.
Markets seemed to pull back following some less-dovish commentary from a few Fed officials on Thursday, however. In particular, Kansas City Fed President Jeffrey Schmid told CNBC’s Steve Liesman that the labour market remained fairly strong and that there was still work to do on inflation.
The week’s economic calendar arguably came in mostly in line with expectations and seemed to do little to sway markets. S&P Global released its first estimate of August economic activity, which confirmed that the manufacturing sector remained in a slump but that the larger services sector continued to expand at a healthy pace.
On London’s equity markets the FTSE 100 rose 0.48% to 8,327.78, while the more domestically-focussed FTSE 250 gained 0.4% to close at 21,189.48.
Direct Line shares dropped after the company revealed a miscalculation in its 2023 Solvency II own funds. The insurer reported that its solvency capital ratio at the end of 2023 was 188%, down from a previously reported 197%, though it remained above the company’s risk appetite range of 140% to 180%.
Melrose Industries also saw a notable decline following a downgrade from UBS, which shifted its rating from ‘buy’ to ‘sell’.
Meanwhile, recruiter Hays faced pressure after reporting full-year earnings on Thursday, where it highlighted a "clear slowdown" in challenging markets.
On the positive side, Evoke, formerly known as 888, saw its shares rise after announcing the acquisition of New Gambling Solutions (NGS), the operator behind Winner.ro, a prominent online betting and gaming platform in Romania.
JD Sports Fashion continued its upward trend for the second consecutive day, buoyed by a return to like-for-like growth in its second quarter.
The STOXX Europe 600 Index ended 1.31% higher amid growing hopes that the Fed and the European Central Bank would both cut interest rates next month. Major stock indices also rose with Germany’s DAX gaining 1.70%, France’s CAC 40 Index 1.71% and Italy’s FTSE MIB 1.83%.
Eurozone business activity picked up in August after stalling in July, according to S&P Global’s purchasing managers’ index (PMI). A first estimate of the HCOB Eurozone Composite PMI Output Index came in at 51.2 from 50.2, as the Olympic Games in France drove the services sector output to a four-month high. (A PMI reading greater than 50 indicates expansion.) Manufacturing production, however, contracted for the 17th month running.
The ECB said growth in negotiated wages in the eurozone—a key data point for monetary policymakers—slowed to 3.55% in the second quarter from about 4.74% in the preceding three months. Separately, the Bundesbank said in its August report that “the expected slow recovery in the [German] economy is being delayed further” by weak foreign demand.
In Asia, Japan’s stock markets made modest gains over the week, with the Nikkei 225 Index rising 0.8% and the broader TOPIX Index up 0.2%. Amid some speculation that recent market turmoil could discourage the Bank of Japan from further hiking interest rates, BoJ Governor Kazuo Ueda reiterated that the central bank would continue to normalize its monetary policy as it gains confidence in the economy achieving 2% inflation in a stable manner. Core consumer price inflation accelerated for the third straight month in July, supporting the BoJ’s hawkish shift this year.
Amid contrasting monetary policy outlooks for Japan and the U.S., the yen strengthened to the high end of the JPY 145 against the USD range, from about JPY 147.6 at the end of the previous week. The yield on the 10-year Japanese government bond rose to 0.90% from the prior week’s 0.88%.
Chinese stocks fell as a light economic calendar and caution ahead of Fed Chair Powell’s Jackson Hole speech kept buyers on the sidelines. Both the Shanghai Composite and CSI 300 Indexes recorded weekly declines, while the benchmark Hang Seng Index in Hong Kong advanced a touch.
On Monday, China’s central bank kept its benchmark lending rates unchanged, reflecting policymakers’ desire to protect profit margins for banks. The People’s Bank of China kept the one-year loan prime rate at 3.35% and the five-year loan prime rate, a policy rate for mortgages and other long-term loans, at 3.85%. Economists largely expected the PBOC’s decision to stay pat on both LPRs after the bank unexpectedly trimmed several key rates in July. However, many economists see room for further loosening in China this year once the Fed starts cutting rates in the U.S.
The Week Ahead
Gross domestic product and personal consumption expenditures data is due out of the US next wee which should be interesting after fears over the health of the US economy have taken centre stage recently.
Global stocks took a hit earlier this month as poor jobs figures raised questions over whether the US was heading for recession, but have since recovered on brighter data.
Next week’s second estimate for GDP growth over the last quarter, alongside the Federal Reserve’s preferred measure of inflation in PCE, will therefore help add to what has so far been an improving picture..
Given the focus on the US economy, any revision from an initially estimated 2.8% growth in GDP over the second quarter could turn heads, with the latest figure due on Thursday.
Core PCE data due on Friday will then come after a 0.2% rise in June, which was higher than expectations for a 0.1% increase.
Forecasts are for another 0.2% monthly increase this time round, with any upward surprises set to raise eyebrows after inflation has appeared to come under control.
The two data sets come as anticipations grow for a string of Federal Reserve base rate cuts this year, alongside hopes that the bank has been able to stem inflation without sending the economy into recession.
Back in the UK, a quieter bank holiday week will see mortgage approvals data for July on Friday, while EU inflation figures are also due late on in the week.
Enjoy the rest of your weekend and here’s to another good week next week.
