The Claims data last week preserved
The markets, which had been unnerved
By thoughts that Japan
Did not have a plan
To exit QE unobserved
Now yesterday’s data revisions
To Payrolls cemented decisions
That when Powell speaks
He’ll say, “in four weeks
Rate cuts are quite clear in my visions”
Well, the big news was that the BLS revised down the number of new jobs created between April 2023 and March 2024 by 818K, not far from the extreme calls of 1MM. Alas, this has become more of a political talking point than an economic one with claims of subterfuge on the part of the current administration in an effort to flatter their record. From an economic perspective, however, to the extent that we believe this data is accurate, it offers a far greater case for the Fed to cut rates next month. After all, the strong labor market had been one of the key rationales for the Fed to maintain higher for longer, so if that market is not as strong as previously believed, lower rates would be appropriate.
In addition to the NFP revisions, which had gotten virtually all the press, the FOMC Minutes of the July 31stmeeting were also released. It turns out that according to those Minutes, the discussions in the room included several members calling for a cut at that meeting, and unanimity in a cut by September. That feels a bit more dovish than the post-meeting press conference where Powell wouldn’t commit to a September cut, seemingly trying to retain some optionality. Now, the market has been pricing in a full 25bp cut since a week before the last meeting, so it’s not as though people have been fooled. And we are still looking at a 30% probability of a 50bp cut in September, but to this poet, absent a negative NFP reading in two weeks’ time, September is going to bring a 25bp cut.
Here’s the thing, though, will it matter? It certainly won’t have any impact on the economy for any appreciable time (remember those long and variable lags) although it could be a signaling event. But exactly what does it signal? If the economy is truly robust, why cut? If the economy is weakening quickly, or not as strong as previously thought, then why just 25bps? In the big scheme of things, 25bps has exactly zero marginal impact on economic activity. If they were to explain they are entering a series of more aggressive rate cuts to accommodate weakening growth, well that seems like a signal they don’t want to send either, especially politically. One final thought, when things are going well in the economy, nobody is talking about any kind of ‘landing’, whether soft or hard. The very fact people are discussing a ‘soft-landing’ is recognition that the economy is slowing down. I believe that most of us understand that is the case, but for the media to inadvertently admit that is the case in this manner speaks either to their stupidity or their cupidity.
Ok, so how did markets respond to these two stories? The first thing to note is that while the NFP revisions were scheduled to be released at 10:00, they were a bit late. As you can see in the chart below, there was an immediate jump in the equity market, which slowly retraced until the Minutes were released and then the dovishness was complete, and we saw a steadier appreciation.
Source: Bloomberg.com
Net, the clear belief from the investment community was that the Fed is more dovish than they have been letting on, and so equity markets in the US rallied on the day. Once again, that followed through in Asia, where pretty much all markets except mainland China (CSI 300 -0.25%) followed suit with the Hang Seng (+1.45%) the leader, but strength throughout the region overall. In Europe, Flash PMI data was released this morning showing that Germany continues to stumble, especially in the manufacturing sector, and that the whole of Europe is lackluster at best. While the Olympics seemed to help French services output, net, there is not much excitement. The upshot is that ECB members are talking up further rate cuts and the result is European bourses are gaining some ground this morning, but only on the order of 0.2%. As to US futures, they are little changed at this hour (7:15).
In the bond market, yields are edging higher with Treasury yields up by 2bps and similar gains across Europe and the UK. In truth, I would have expected European yields to slide a bit on the PMI data, but clearly that is not the case. Interestingly, 10yr JGB yields slipped lower by another 1bp as the market there prepares for testimony by BOJ Governor Ueda tonight. In a truly unusual event, the Diet (Japan’s congress) called him in to testify before both the Lower and Upper houses even though it is technically not in session. It seems they are very concerned about his hawkishness and how it impacted Japanese stock markets and the yen two weeks ago. (As an aside, I cannot imagine something like that happening in the US, it would be extraordinary given the ostensible independence of the Fed.)
Turning to commodity markets, after falling 1% further yesterday, oil (+0.5%) is bouncing slightly, although it remains far closer to the lower end of its trading range than even the center. Gold (-0.3%) continues to hang around just above $2500/oz but has not made any real headway above since it first broke through that level last Friday. A very interesting X thread on this subject by Jesse Colombo (@TheBubbleBubble), a pretty well-known commentator on markets (167K followers on X), highlighted that while gold has made new all-time highs vs. the dollar, it has not done so vs. other currencies and that process needs to be completed to see a more significant move. I raise this idea because if/when it occurs, it is likely to be a signal of far more distress in the economy and markets than we are currently seeing. As to the rest of the metals complex, they are having lackluster sessions as well, with copper ceding -1.0% and silver (-0.15%) a touch softer.
Finally, the dollar refuses to collapse completely despite the growing view that the Fed is getting set to embark on a series of rate cuts. While both the euro (-0.2%) and pound (+0.1%) are little changed this morning, both sit near 1-year highs vs. the dollar. The thing about both these currencies that has me concerned is that energy policies currently being implemented in both Germany and the UK, with many other continental countries going down the same path, are almost guaranteed to destroy all manufacturing capability and force it to leave for somewhere with lower energy prices. While both of those economies are clearly services driven, I assure you that the destruction of manufacturing capacity is going to have long-term devastating impacts on those nations, and by extension their currencies. Just something to keep in mind. Elsewhere, the yen (-0.6%) is slipping today and has been in a fairly tight range since the pyrotechnics from two weeks ago. But we are also seeing weakness in ZAR (-0.75%), NOK (-0.5%) and SEK (-0.4%) to name a few, and general weakness, albeit in the -0.2% to -0.3% range across the rest of the G10 and EMG blocs. The dollar is not dead yet.
On the data front, this morning brings Initial (exp 230K) and Continuing (1870K) Claims as well as the Chicago fed National Activity Index (.03) at 8:30. Later this morning, Flash PMIs (manufacturing 49.6, services 53.5) are due and then Existing Home Sales (3.93M) finishes things off. There are no scheduled Fed speakers but then all eyes are on Jackson Hole tomorrow when Chairman Powell speaks.
Given what we learned yesterday regarding both the labor market and the last FOMC meeting, it seems clear the Fed is going to cut 25bps next month. Of more interest, I believe, will be the way Powell lays out his vision for what needs to occur for the Fed to continue the process and his guideposts. Remember, they are still shrinking the balance sheet, albeit slowly, but cutting rates and reducing liquidity simultaneously may have unintended consequences. If they stop shrinking the balance sheet, though, I believe the market will view that as a very dovish signal, and the dollar would fall sharply. I’m not saying that’s what I expect, just that would be the result. But for today, it is hard to believe we see a large move ahead of tomorrow’s speech.
Good luck
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