Get Ready for a Powell Frenzy

August 23, 2024

Get Ready for a Powell Frenzy

  • Financial markets will be guided by Fed Chair Jay Powell’s keynote speech today.
  • The risk in our view is Powell leans against aggressive market pricing for Fed funds rate cuts.
  • BOJ Governor Ueda sticks to the bank’s July meeting hawkish policy guidance.

USD is struggling to sustain yesterday’s modest gains triggered by continued evidence of US economic outperformance. In August, the composite PMI was 54.1 for the US, 53.4 for the UK, 53.0 for Japan, and 51.2 for the EU.

Financial markets will take their cue today from Fed Chair Jay Powell’s keynote speech on the economic outlook (3:00pm London). Powell is widely expected to signal that it would be appropriate to start easing policy at the September 18 FOMC meeting. In our view, the risk is Powell leans against aggressive market pricing for Fed funds rate cuts. Fed funds futures continue to price-in 100bps of total easing by year end while the median June FOMC projection is a 25bps cut this year.

A less dovish policy guidance from Powell than is currently implied by the money market would trigger a relief rally in USD, lead to a sell-off in Treasuries and a correction in stocks. Check-out our Jackson Hole Economic Symposium Preview for more details.

EUR/GBP is edging lower supported by a more encouraging UK growth outlook relative to the Eurozone. The UK economy is in a good place as the August PMI showed private sector output rising at its fastest pace since April and input cost inflation slowing to its lowest in just over three-and-a-half years. The implication is the BOE is unlikely to slash the policy rate by more than is currently priced-in by year-end (roughly 50bps).

In contrast, the Eurozone growth outlook is soggy. While the Eurozone composite PMI unexpectedly increased to a 3-month high at 51.2 in August, the boost largely comes from a surge in services activity in France linked to the Olympic Games. Worrisomely, the downturn in Eurozone manufacturing activity deepened to an 8-month low.

The ECB is widely expected to deliver a follow-up 25bps rate cut at the September 12 meeting. Indeed, ECB Governing Council member Martins Kazaks noted yesterday “given the data we have at the moment, I would be very much open for a discussion of yet another rate cut in September.” Kazaks added that “even if inflation over the next few months keeps moving sideways, it is consistent with further rate cuts.”

Bank of England Governor Andrew Bailey speaks later today. The text of his speech will be released at 4:00pm London. The ECB July consumer inflation expectations survey is up next (9:00am London).

JPY is outperforming. Bank of Japan (BOJ) Governor Kazuo Ueda sticks to the BOJ July meeting hawkish policy guidance during his parliamentary testimony. Ueda reiterated the BOJ “will raise interest rates further if the economy and prices move in line with our projections.” Still, Ueda cautioned that financial markets “remain in unstable conditions” suggesting the bar for a follow-up rate increase by year-end is high. The swaps markets imply a 36% probability of a 25bps BOJ rate hike by December.

Japan’s July policy relevant core CPI prints matched consensus and tracked the BOJ projection. Annual core (ex-fresh food & energy) inflation slowed to a 22-monht low at 1.9% from 2.2% in June (BOJ 2024 forecast: 1.9%) and core (ex-fresh food) inflation printed at 2.7% vs. 2.6% in June (BOJ 2024 forecast: 2.5%). Annual headline CPI inflation remained at 2.8% for a third consecutive month in July (consensus: 2.7%). Bottom line: we doubt the BOJ will tighten more than is currently priced-in (+25bps over the next 12 months) because underlying inflation in Japan is in a firm downtrend. This will limit JPY upside momentum.

USD/CAD is trading heavy at key technical support around 1.3590 (200-day moving average). Canada’s June retail sales data (1:30pm London) is expected to further cement money market pricing for an additional 75bps of Bank of Canada policy rate cuts by year-end. Statistics Canada’s advanced retail indicator suggests sales decreased -0.3% m/m after falling -0.8% in May.

NZD/USD is firmer on broad USD weakness and shrugged-off New Zealand’s retail sales slump. Retail sales volume fell more than expected in Q2, adding to evidence that real GDP contracted over Q2 (Q2 GDP data is due September 18). The total volume of retail sales fell -1.2% q/q in Q2 (consensus -0.9%) following a downwardly revised 0.4% rise (prior: 0.5%) the previous quarter. Poor retail sales activity reinforces the swaps market pricing for another 75bps of RBNZ policy rate cuts by year-end and is a headwind for NZD.

Brown Brothers Harriman & Co. (“BBH”) may be used to reference the company as a whole and/or its various subsidiaries generally. This material and any products or services may be issued or provided in multiple jurisdictions by duly authorized and regulated subsidiaries.This material is for general information and reference purposes only and does not constitute legal, tax or investment advice and is not intended as an offer to sell, or a solicitation to buy securities, services or investment products. Any reference to tax matters is not intended to be used, and may not be used, for purposes of avoiding penalties under the U.S. Internal Revenue Code, or other applicable tax regimes, or for promotion, marketing or recommendation to third parties. All information has been obtained from sources believed to be reliable, but accuracy is not guaranteed, and reliance should not be placed on the information presented. This material may not be reproduced, copied or transmitted, or any of the content disclosed to third parties, without the permission of BBH. All trademarks and service marks included are the property of BBH or their respective owners.© Brown Brothers Harriman & Co. 2024. All rights reserved.

As of June 15, 2022 Internet Explorer 11 is not supported by BBH.com.

Important Information for Non-U.S. Residents

You are required to read the following important information, which, in conjunction with the Terms and Conditions, governs your use of this website. Your use of this website and its contents constitute your acceptance of this information and those Terms and Conditions. If you do not agree with this information and the Terms and Conditions, you should immediately cease use of this website. The contents of this website have not been prepared for the benefit of investors outside of the United States. This website is not intended as a solicitation of the purchase or sale of any security or other financial instrument or any investment management services for any investor who resides in a jurisdiction other than the United States1. As a general matter, Brown Brothers Harriman & Co. and its subsidiaries (“BBH”) is not licensed or registered to solicit prospective investors and offer investment advisory services in jurisdictions outside of the United States. The information on this website is not intended to be distributed to, directed at or used by any person or entity in any jurisdiction or country where such distribution or use would be contrary to law or regulation. Persons in respect of whom such prohibitions apply must not access the website.  Under certain circumstances, BBH may provide services to investors located outside of the United States in accordance with applicable law. The conditions under which such services may be provided will be analyzed on a case-by-case basis by BBH. BBH will only accept investors from such jurisdictions or countries where it has made a determination that such an arrangement or relationship is permissible under the laws of that jurisdiction or country. The existence of this website is not intended to be a substitute for the type of analysis described above and is not intended as a solicitation of or recommendation to any prospective investor, including those located outside of the United States. Certain BBH products or services may not be available in certain jurisdictions. By choosing to access this website from any location other than the United States, you accept full responsibility for compliance with all local laws. The website contains content that has been obtained from sources that BBH believes to be reliable as of the date presented; however, BBH cannot guarantee the accuracy of such content, assure its completeness, or warrant that such information will not be changed. The content contained herein is current as of the date of issuance and is subject to change without notice. The website’s content does not constitute investment advice and should not be used as the basis for any investment decision. There is no guarantee that any investment objectives, expectations, targets described in this website or the  performance or profitability of any investment will be achieved. You understand that investing in securities and other financial instruments involves risks that may affect the value of the securities and may result in losses, including the potential loss of the principal invested, and you assume and are able to bear all such risks.  In no event shall BBH or any other affiliated party be liable for any direct, incidental, special, consequential, indirect, lost profits, loss of business or data, or punitive damages arising out of your use of this website. By clicking accept, you confirm that you accept  to the above Important Information along with Terms and Conditions.

 
1BBH sponsors UCITS Funds registered in Luxembourg, in certain jurisdictions. For information on those funds, please see bbhluxembourgfunds.com



captcha image ↻

Type in the word seen on the picture

I am a current investor in another jurisdiction

1 of 2

2 of 2