Main Street Macro: Casting For Bigger Fish In Jackson Hole

Economic

Summary:

This week’s Jackson Hole Economic Policy Symposium is focusing on a broader issue: reassessing the effectiveness and transmission of monetary policy.With positive recent data on inflation, labor markets, and consumer spending, the Fed appears to be navigating towards a soft economic landing. Powell's speech at the Jackson Hole Economic Policy Symposium will be closely watched.Attendees will weigh how the economy reacts, or doesn’t react, to Fed rate decisions.

So, are you cutting rates or not?

Federal Reserve Chair Jerome Powell has probably been asked this question more times in the last six months than any Fed chair in the last 20 years. The last time benchmark rates were this high was early 2001.

But rate cuts won’t be the most pressing question for Powell or other Fed members this week when they gather in scenic Jackson Hole, Wyoming. This annual convocation of roughly 120 high-profile academics, global policymakers, and business leaders has another mission entirely.

This year, in a location known for its fly fishing, the Fed will be casting for fish bigger than the timing of its next rate cut.

The agenda at this year’s Jackson Hole Economic Policy Symposium includes discussion on an overarching issue: Reassessing the Effectiveness and Transmission of Monetary Policy. In plain English, attendees will weigh how the economy reacts, or doesn’t react, to Fed rate decisions.

It’s an important topic, one that will give Fed policymakers an opportunity to polish the central bank’s brand as a strategic steward of price stability and full employment. Here’s how.

Rewarding patience

Last week’s economic data could have not broken better as a prelude to Jackson Hole. After a topsy-turvy two weeks, steadfast central bank policymakers were rewarded with an abundance of good news when three big macroeconomic watch points—inflation, the labor market, and consumer spending—all came out strong.

Initial jobless claims, a measure of layoffs, dropped to a five-week low. The Consumer Price Index fell to 2.9 percent, the lowest level in more than three years. And July retail sales exceeded expectations, signaling that consumers are still in good shape as the primary drivers of economic growth.

Confronted with this upbeat data, Wall Street shook off the recession fears that had caused wild market swings just a few days earlier, and again embraced the possibility that the Fed had indeed engineered a soft landing for the economy.

Focusing on the long term

Last week’s data wasn’t all good. One area of the economy that’s been particularly resistant to the Fed’s policy charm is housing.

The July CPI measure of shelter costs, which estimates the monthly cost of renting, rebounded to a 0.4 percent increase month over month, erasing a drop in June. Shelter costs composed 90 percent of the monthly increase in inflation, according to the Bureau of Labor Statistics.

Housing inflation can’t be slowed by interest rates alone. It requires an increase in affordable inventory, which appears to be waning. Census data on housing starts shows residential construction down 16 percent from last year.

Housing isn’t the only problem that rate cuts won’t solve. Demographics and globalization, once disinflationary forces, have grown less effective in tamping down price growth. Periodic bouts of inflation are likely to be more common in the future.

At Jackson Hole, it would behoove the Fed to remind market participants that they’re in it for the long haul, not just for hotly anticipated rate cuts in September.

Reframing the discussion

In Jackson Hole, Powell will have the opportunity to address several open questions in his highly anticipated remarks.

For example, the central bank’s current monetary framework was adopted when the Fed was trying to solve for too-low inflation. Do policymakers need to change their target inflation comfort zone?

Another open question is when the Fed should employ quantitative easing, the central bank’s big-scale purchases of bonds and other financial assets, to help drive interest rates down. What’s the best way to reverse those moves—to employ quantitative tightening—when they’re no longer needed?

Finally, it’s critical for Fed policymakers to provide context on the new normal. Main Street and Wall Street have become accustomed to rock-bottom interest rates and record-low unemployment, both of which can’t be sustained. The Fed should take the lead in defining what constitutes normal for benchmarks in a healthy U.S. economy.

My Take

In 2022, the Jackson Hole conversation turned to the new potential for higher-for-longer inflation and interest rates in the wake of the pandemic. In 2023, the discussion centered on permanent changes to the structure of the global economy caused by the pandemic.

As in previous years, thisyear’s symposium is likely to generate more hard questions than easy answers.But it’s also chance for reinvention.

For the past three years, market-watchers have criticized the Fed for being late to recognize the pandemic’s inflation threat, and late to cut rates as that threat receded.

But the recent run of good economic data has turned this year’s Jackson Hole conference into a chance at redemption, of sorts, for the data-dependent central bank. At this critical economic juncture, it’s a chance for the Fed to refresh its reputation as a central bank that’s not behind the curve, but in front of it.

I’ll be in Jackson Hole this week, and Main Street Macro will be on hiatus until Sept. 9.

The Week Ahead

Wednesday: Fed meeting minutes from July will provide clues to policymakers’ thinking on the state of the economy and the need for rate cuts.

Thursday: We’ll get signals on the current state of manufacturing and services providers and their hiring plans from the S&P Global flash PMI survey.

Existing home sales data from the National Association of Realtors will give us a read on how the summer selling season it progressing after getting a boost from slightly higher inventory and slightly lower mortgage rates.

Friday: The eyes and ears of all economists, including mine, will be tuned into Powell’s speech from the Jackson Hole. Just bear in mind that whatever he talks about, he won’t tell us when the Fed will cut rates. That’s a question for next month.

To stay updated on all economic events of today, please check out our Economic calendar

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Warren Takunda

Economic

Collated forecasts from the world's leading investment banks show the exchange rate will end the third quarter at higher levels, with the median estimate now residing some 70 pips higher than the current level in the spot exchange rate.

Forecast estimates - available as a free discretionary download from Corpay - show that although the median estimate for Pound-Euro is higher, the mean is slightly lower than current levels.

These data suggest the recent fall in the Pound leaves it better balanced from a valuation perspective, and if the 'big brain' is right, it is set for a gentle and modest appreciation trend into the quarter-end.

Looking at some of the more gutsy calls amongst the investment banks, LBW Bank remains the bull in the pack, holding out for a peak at 1.22 by the end of the third quarter. Amongst the bears, UK high street name Santander thinks a return to 1.15 is possible by the end of September.

Having a median and mean forecast from over 30 of the world's best analysts allows us to gauge the scale of August's fall and assess how this has impacted perceptions of Pound Sterling's value.

The Pound to Euro exchange rate fell 2.30% peak-to-trough at one stage earlier this month, with declines following a Bank of England interest rate cut that prompted investors to reduce a significant long exposure to the British Pound.

The subsequent technical rebalancing in the market has left positioning somewhat cleaner, and the Pound has recovered about half of its decline to trade at around 1.1730 at the time of writing.

Those analysts who think the Pound can end the third quarter higher than it currently trades say the UK's relatively high interest rates can underpin the currency over the coming weeks.

"GBP remains the best performing G10 currency year-to-date. The fundamental/secular positives remain the same and we are reassured that recent weakness has not been a reflection of the UK outlook," says Bank of America in a recent note.

It was reported last week that the UK economy experienced a strong first half of the year as GDP grew 0.6% over the three months to June. It was also reported the unemployment rate fell to 4.2% in June from 4.4% in May, bolstered by a higher-than-expected pace of hiring.

These data will lessen the need for the Bank of England to deliver back-to-back interest rate cuts in 2024, further bolstering UK interest rate expectations and the Pound.

"A rebounding labour market would, all else equal, boost wage forecasts for 2025. Indeed, some surveys suggest pay growth has picked up momentum in recent months," says Rob Wood, UK Economist at Pantheon Macroeconomics. "All told, we see a high probability the MPC will keep interest rates on hold in September. We forecast a cut in November if growth or inflation fails to surprise significantly to the upside."

Source: Poundsterlinglive

To stay updated on all economic events of today, please check out our Economic calendar

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Danske Bank

Central Bank

In focus today

In Sweden, the Riksbank’s rate decision, a policy statement and a shorter policy report will be published at 09.30 CET. A press conference follows at 11.00 CET. There will be no new macro forecasts and no new rate path. A 25bp rate cut is – or should be – a done deal. Instead, market focus will be on communication. We expect that they will guide toward two more cuts this year, which is slightly more dovish than in June, though less dovish than market is pricing (three more cuts).

In the euro area, we will get final inflation figures for July. The final HICP data allow us to see how the important domestic inflation indicator (‘LIMI’) fared in May, see Research Euro Area – The importance of domestic inflation guiding ECB policies, 6 August. The preliminary figures showed that service price pressures eased to around 0.3% m/m, which is still too high, but lower than a couple of months ago.

In Denmark, we get national accounts data for Q2. We expect 1% GDP growth in Q2. GDP declined 1.4% q/q in Q1 on the back of a very strong fourth quarter in 2023. This leaves room for growth in Q2.

In Turkey, the central bank will announce its rate decisions at 13.00 CET. The Central Bank of Turkey has concluded its hiking cycle and is expected to keep the policy rate unchanged at 50%. Since the July meeting, inflation has developed largely in line with their forecasts, as headline inflation in month-on-month terms increased temporarily in July, while the rise in underlying inflation was limited.

Fed’s Bostic will be on the wire in the evening at 19.35 CET.

Economic and market news

What happened overnight

Peoples Bank of China (PBOC) left loan prime rates unchanged as expected in the market, after interest rates were lowered in July. More easing is expected later in Q3 as the economy is struggling and PBOC has been waiting for the Fed to start easing before cutting rates (to avoid downward pressure on the renminbi).

What happened yesterday

In the euro area, ECB’s Rehn (voting member) spoke about monetary policy. He said that ECB may need to lower interest rates at the September meeting, due to negative growth risks arising, while inflation is on the right track in his eyes. Markets price in a 90% probability of a rate cut in September. We, however, still stick to our call of no cut in September.

Market movements

Equities: Global equities were higher yesterday, and this morning’s post might start to sound like a broken record with the MSCI World Index gaining for its eighth consecutive day. Equities were up, volatility was lower (VIX below 15), and cyclicals outperformed defensives. As US stocks rallied into the cash close, all 25 industries finished higher on a day that saw virtually no headline news to drive the market.

FOMO is back, and all the fear about a recession among equity investors seems to have gone. Please remember, this is typically how investor behaviour appears when we are very late in the cycle. In the US yesterday, Dow +0.6%, S&P 500 +0.97%, Nasdaq +1.4%, and Russell 2000 +1.2%. This morning, most Asian markets are higher, led by Japanese markets, which are up more than 2%, while Chinese stocks are moving in the opposite direction. Futures in Europe are mixed, while in the US, futures are marginally stronger.

FI: Markets waiting for the important ECB data and Jackson Hole speech later this week resulted in a tight trading range. Markets are also waiting for toda’s supply with an expected 5y Finland deal and a 10y and long-end German bond tap. 10y Bunds ended virtually unchanged at 2.45%. Key events this week are the EA and US PMIs on Thursday, EA negotiated wage data on Thursday as well as Powel’’s speech in Jackson Hole on Friday. Lane speaks on Saturday.

FX: JPY was the top performer among G10 currencies yesterday, were the USD stay on a weak footing. EUR/SEK declined below 11.50 before the Riksbank rate decision today.

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Warren Takunda

Economic

Malaysia and Singapore's currencies have strengthened to 18-month highs against the dollar over the past couple of months due to their tighter central-banking policies.

The two currencies' rise stood out as most Asian currencies generally improved performance against the dollar, as the U.S. Federal Reserve contemplates a rate cut. Analysts and investors will be looking for signs of easing in Chair Jerome Powell's speech at the central bank's economic policy symposium on Aug. 22-24 at Jackson Hole, Wyoming.

The Malaysian ringgit was the best-performing Asian currency, up 5.3% for the year through Tuesday, trading at 4.361 per dollar, its highest point since February 2023. The currency's strength is a reversal from February when it dropped to its weakest in 26 years.

"Efforts by the Bank Negara Malaysia [central bank] to encourage state-linked corporates to support the ringgit have helped," said Lloyd Chan, FX strategist at MUFG in Singapore.

He said companies have brought back overseas income to Malaysia, and that Kumpulan Wang Persaraan (Diperbadankan), the country's largest state pension fund, has stopped investing overseas.

A stronger Chinese currency in response to the U.S. moving towards cutting rates has helped boost the Malaysian ringgit, said David Forrester, a senior FX strategist at Credit Agricole CIB in Singapore.

"The Malaysian ringgit has been outperforming its Asian peers due to the unwinding of long U.S. dollar-Chinese yuan positions," he said, referring to positions betting on the weakness of the Chinese currency. The Malaysian ringgit is highly correlated with the Chinese currency.

The Singapore dollar rebounded to 1.3066, a level also not seen since February last year, after slumping to 1.3685 in April.

Malaysia, Singapore Currencies Rise on Tight Policies Before Jackson Hole_1

"Maintaining a tight policy setting has resulted in a strong Singapore dollar," said MUFG's Chan. The Monetary Authority of Singapore, the country's central bank and financial regulator, uses its policy centered on exchange rates rather than interest rates to keep imported inflation in check.

Singapore has kept its hawkish monetary policy unchanged since October, even as June's inflation figures came in lower than expected.

The South Korean won and the Taiwanese dollar were among the worst performers, down 2.7% and 3.9%, respectively.

Fiona Lim, senior forex strategist at Maybank Singapore, said the two currencies have weakened because of their export-oriented economies.

"A large part of recent market volatility is due to fears that the global economy could be weakening ... As such, even as U.S. Treasury yields dropped quite precipitously, the Korean won and the Taiwanese dollar were laggards in the region," she said.

Traders are pricing in big U.S. rate cuts of more than 0.9% by the end of this year, underscoring lingering fears the country may be falling into a recession, she said. But she said the South Korean won and the Taiwanese dollar could strengthen once global growth shows signs of gaining momentum.

South Korea's central bank is expected to keep its rates unchanged at Thursday's monetary policy meeting, said Carlos Casanova, senior economist for Asia at Union Bancaire Privee in Hong Kong. The country's July Consumer Price Index came in higher than expected "which could prompt the Bank of Korea to wait before making any changes," he said.

The Japanese yen has trimmed its losses rapidly, as the Bank of Japan decided to hike its policy rate in late July, but is still one of the worst performing currencies in the region along with the Vietnamese dong.

Source: NikkeiAsia

To stay updated on all economic events of today, please check out our Economic calendar

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ING

Commodity

Energy

Political

Energy – Potential ceasefire weighs on oil

Oil prices came under renewed pressure yesterday. ICE Brent settled a little more than 2.5% lower on the day, which saw the front-month contract close well below US$78/bbl. Sentiment in the market remains bearish. Demand concerns centred around China continue to linger. Recent data releases, reinforce the view of weaker Chinese oil demand. Trade and industrial output numbers last week suggested that apparent oil demand continued to trend lower in July. These worries mean that speculators continue to be hesitant about jumping into the market, despite expectations for a deficit environment for the remainder of the year. While the speculative net long in ICE Brent increased over the last reporting week, this was predominantly driven by short covering, rather than fresh longs.

The other key development weighing on prices is the prospect of a ceasefire between Israel and Hamas. Antony Blinken, the US Secretary of State has said that Israel has accepted a ceasefire, or at least a “bridging” proposal for a ceasefire. This has helped ease some fears over supply risks hanging over the oil market. However, we still need to see if Hamas will accept the deal, and if we get a deal, whether the ceasefire holds. Oil prices are likely to remain sensitive to how this evolves.

EU gas storage is 90% full now, hitting the European Commission’s target more than 2 months ahead of schedule and, assuming no supply shocks, should leave storage close to 100% full ahead of the next heating season. However, the market is clearly more focused on supply risks, and these are keeping European gas prices at elevated levels. Risks are still centred around Russian pipeline flows through Ukraine with developments in the Kursk region of Russia leaving these flows vulnerable to supply disruptions.

Metals – Gold hovers near record highs

Gold is hovering near record highs after it topped $2,500/oz for the first time on Friday. The move higher came after disappointing US housing data reinforced expectations of rate cuts from the US Fed. Gold prices are up 22% so far this year amid geopolitical uncertainties, expectations of interest rate cuts from the Fed and strong buying appetite from central banks. Looking ahead, we expect gold to stay near record highs on expectations that the US Fed is getting closer to an interest rate cut. We believe that gold’s focus will remain firmly on the scope and timing of the Fed’s likely move to cut rates, with Jackson Hole later this week potentially providing some further clarity on the path the Fed may take.

Agriculture – Cocoa rises on weather conditions

US cocoa futures extended gains for a second consecutive session yesterday due to concerns over weather conditions. Forecasts for dry weather in some parts of West Africa could hamper crop growth in the current season. There are suggestions that farmers in southeast Nigeria are facing difficulties accessing plantations due to rains. Meanwhile, in the southwest, conditions remain dry, affecting seedlings planted in late May.

The latest crop progress report from the USDA shows that the US corn crop is in relatively good condition with 67% of the crop rated good-to-excellent, up from 58% at the same stage last year. Similarly, 68% of the soybean crop is rated good to excellent, compared to 59% at the same stage last year. Finally, 96% of the winter wheat crop is harvested, above the 95% harvested at the same stage the previous year.

Data from the Uganda Coffee Development Authority show that Uganda’s coffee shipments rose 22.4% MoM and 26% YoY to a record high of 821.6k bags (previous record of around 743.5k bags in August 2023) in July, following a healthy harvest in the Greater Masaka, and Southwestern region. Cumulative shipments for the season (October to July) stood at 5m bags (60 kg bag), up 3.3% YoY.

Weekly export inspection data from the USDA for the week ending 15 August shows that US exports for corn and soybeans remained strong while wheat shipments slowed over the last week. Inspections of corn for export stood at 1,166.1kt, up from 986.2kt in the previous week and 510.6kt reported a year ago. Similarly, export inspections for soybeans stood at 398.2kt over the week, up from 349.6kt in the previous week and 320.4kt reported a year ago. Finally, US wheat export inspections came in at 347.5kt compared to 666.7kt a week ago and 311.3kt seen a year earlier.

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RBA

Remarks of Officials

Central Bank

On August 20, the RBA released the minutes of its August monetary policy meeting, with the main points as follows:

Regarding the aggregate demand, domestic demand had been a little stronger in early 2024 than had been expected in May, driven by household and public consumption. That said, household consumption growth remained well below pre-pandemic averages. While there was still strong growth in underlying demand for housing, this had diminished slightly as the average household size had increased, possibly in response to higher rents and housing prices. Growth in GDP was still projected to remain below growth in aggregate supply for a period, bringing the economy to a more balanced state and thereby reducing inflationary pressure.

Labour market conditions in the June quarter continued to ease gradually. The unemployment rate had increased a little, owed more to reduced flows of workers into employment than an increase in layoffs. Both the participation rate and the employment-to-population ratio remained high, and the average hours worked were a little higher than previously expected. Meanwhile, the level of job vacancies remained well above both its pre-pandemic average and outcomes in other advanced economies, despite falling significantly from its peak. The labour market was expected to continue to ease gradually before stabilising in early 2026, and wages growth was expected to slow gradually as the labour market eased.

Underlying inflation had eased a little, but in quarterly terms, the outcome was not much lower than it was a year earlier. Inflation in prices of market services had eased in the June quarter but remained high, given the persistently strong growth in both labour and domestic non-labour costs. As such, the forecast return to the inflation target range of 2–3 percent was expected to be a little later than anticipated in May.

Data shows that inflation in the past months dropped steadily but remained above target. Members assessed that the risk of inflation not returning to target within a reasonable timeframe had increased, so holding the cash rate steady for an extended period would be appropriate to balance the prevailing risks to inflation with those surrounding the outlook for the labour market.