What Is "Demure and Mindful" to Real Estate? Let's Look at First-time Buyers

Summary:

Looking at the data, let's focus on first-time buyers. First-time buyers have to be "demure and mindful" in many ways.

Finances

Housing affordability is a struggle, with current high home prices and elevated mortgage interest rates. In nearly half of metro areas, home buyers need a family income of at least $100,000 to purchase a home with a 10% down payment. Since first-time buyers do not have housing equity to rely on, they are making financial sacrifices to enter homeownership. First-time buyers today are older, with a median age of 35 and a household income of nearly $25,000 more than the past year. They have had time to be demure and mindful of their home purchase.

Prior living situation

First-time buyers may also be demure and mindful before even entering homeownership. Nearly one-quarter of first-time buyers purchased their home after moving directly from a family or friend's home. Living at a family home to save for a down payment epitomizes being demure and mindful of one's finances.

Buyer offers

While more inventory is trickling into the housing market, there is still limited inventory. First-time buyers have to be patient when there are multiple offers. The typical seller receives more than one offer, and the typical home sells in under a month, which indicates a fast-paced housing market. First-time buyers typically have a smaller down payment and less room to negotiate on home price. They must be demure and mindful that they may have to place offers on more than one home before a contract is accepted.

Working with a real estate agent

Eighty-nine percent of home buyers use a real estate agent or broker to purchase their home. Buyers want a real estate agent or broker who is not only able to help them find the right home but is going to help them negotiate and to help them explain and understand the real estate market. These factors are especially true for first-time home buyers. This is the biggest financial purchase of one's life, and real estate agents are helping buyers achieve the American dream. Certainly, one can consider helping a home buyer achieve part of the American dream as being demure and mindful.

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ING

Economic

Stocks

Supply, elections and rate cuts remain the three pillars underpinning spread developments in the coming months. We expect spreads will remain in a narrow trading range for the remainder of the year and volatility will be emphasised by these three pillars.

A combination of recession fears in the US, concerns over a wider conflict in the Middle East, the unwinding of the Japanese carry trade due to the outperforming yen, and the markets now pricing in a more aggressive Federal Reserve rate cut have all contributed to the recent weakness in credit. We expect there could also be some volatility around the US elections in November. In our opinion, these periods of widening create an opportunity for pick-up, as spreads will stay mostly contained and retrace promptly on strong technicals.

Six Reasons Credit Spreads Are Set to Stay Tight_1

Six Reasons Credit Spreads Are Set to Stay Tight_2

Six reasons spreads will stay tight

Technical strength – demand is plentiful

Technicals have been keeping credit markets rather compressed and rangebound over the past six months. Strong inflows on the back of the very attractive yield are still present in the credit space. Demand remains high for credit, with yields still marginally in excess of dividend yields.

Six Reasons Credit Spreads Are Set to Stay Tight_3

We have also seen strong inflows from mutual funds and ETFs, with EUR investment grade inflows amounting to 6% of assets under management (AuM) on a year-to-date basis, and nearly 8% on a 52-week basis. EUR high yield remains positive but to a lesser extent with just 3.3% of AuM inflowing on a YTD basis. The same high demand for credit is also seen in USD credit on a YTD basis, with over 6% of AuM flowing into USD IG and just under 6% of AuM into USD HY.

EIR IG mutual fund flows have been very concentrated in the short end of credit over the past several months. On a YTD basis, the 0-4yr area has seen 6.5% of AuM inflowing, and the 4-6yr area has seen 5.2% of AuM inflowing. Meanwhile, the 6yr+ bucket has only seen 2.6% of AuM flowing in YTD.

Six Reasons Credit Spreads Are Set to Stay Tight_4

We have already seen some steepening of credit curves over the past few months, but we expect more to come. The long end is not attractive enough to position there (apart from in the primary market, when some new issue premium is being offered). The value area is still in the short to the belly of the curve from both a spread and yield angle (as yield curves still look flat). For corporates, there is a 20bp spread steepness level, we expect that will continue towards 30bp. Similarly for financial spreads, the current steepness is 30bp, which we expect will reach 40bp (using the differential between 7-10yr index and 3-5yr index).

Lastly, the European Central Bank is still holding a rather significant amount of the EUR corporate credit market. As it stands, the ECB holds €303bn under the Corporate Sector Purchase Programme and €46bn under the Pandemic Emergency Purchase Programme. This is a significant 20% of the EUR IG Corporate credit market, which totals c.€1.7tr. This reduces volatility in the market in times of weakness and acts as a backstop for spreads.

Technical strength – slowdown in supply

Supply so far this year has been strong with corporate YTD supply already sitting at €257bn, running ahead of previous years, and financial supply sitting at €351bn. The surprise to the upside has been met with very strong demand, as subscription levels have been at record-breaking levels (an average of nearly four times versus the normal average of three times) while new issue premiums have been very low (as low as 0-4bp on average).

As suspected, supply has been significant in the first half of the year with front loading to take advantage of the large demand, relatively tight spreads and uncertainty on the horizon for the second half of the year with growing geopolitical concerns and multiple elections taking place.

Normally, we would see a 60-40 split between the first half of the year versus the second. This year, we expect the split could be closer to 70-30. The primary market has already opened back up rather early and many deals have been priced. Naturally, the end of August and September will still be plentiful with supply, but a slowdown in the fourth quarter will be more dramatic.

Six Reasons Credit Spreads Are Set to Stay Tight_5

We had forecast an increase, but not record-breaking supply for corporates in 2024. We are certainly on track to see more supply versus last year, despite a slowdown expected in the second half. However, we may see supply surprise slightly more than previously expected. This comes on the back of a soft landing and as such, an increase in M&A activity. We expect supply will continue to be met with strong demand. Already, the deals being priced in the past week have been met with very strong demand with still-low NIPs and large books. The value in the market is still very present at these levels and strengthens our view of a buying-the-dip market.

Total return with falling rates

Total return should increase more as rates fall further in the coming months. The EUR swap rates have already come down substantially, falling by over 100bp compared to this time last year, and falling 50bp in the past few months from the highs of this year. As a result, EUR corporates pencil in a YTD return of 2% and EUR financials have seen a return of 2.7%. This strong total return should increase further in the coming months as our rates strategists expect a further decrease in rates to the tune of 10-20bp, and some steepening of the rate curves as rate cuts continue.

Mostly favourable macro picture

The macro picture still looks to be favourable for the most part. Recession is not our base case with a soft landing more likely, particularly in Europe. Inflation has been kept mostly under control and we don’t foresee a resurgence at this time (although a resurgence of inflation is a risk to our more constructive outlook).

Furthermore, in the event of a Trump presidency in the US – and particularly in a constrained scenario whereby Congress is split with the Democrats winning the Senate and Republicans winning the House – Trump will have more of a focus on the international playing field. This will likely result in a deal with Russia over the Ukraine conflict and, potentially, some reduction in Middle East tensions. These are both credit positives. However, it is still questionable whether a favourable deal with Russia will be made. And on the flip side, any implementation of tariffs is a GDP negative.

Recovering real estate

The real estate state sector has recovered a great deal in the past few months after really feeling the pinch in the higher rates environment. The differential over the overall index has almost recovered to the levels of January 2022, which used to average between a 25-30bp premium for the sector versus around 40bp now. This is down from the significant 190bp differential at the peak real estate wides.

Naturally, there is still some tension and uncertainty in aspects of the sector, but most names are in a comfortable enough spot. There has been some dispersion between names in terms of the performance of quarterly numbers. Broadly speaking, earnings growth remains robust while valuations have shown signs of bottoming out and have decreased in some places – but the recovery will be varied. We have also seen some issuers return to the bond market, a strong positive signal. With rates falling more from here, the sector should continue to feel relief.

Six Reasons Credit Spreads Are Set to Stay Tight_6

Tight CDS and iTraxx Main

CDS levels are trading rather tight. The iTraxx main is trading at just 54bp, close to the tightest levels seen over the past two years, and is trading inside cash spreads. This indicates the low level of risk being priced in and notably low volatility. The implied one-year default rate of the iTraxx main at the moment is just 0.75%. Six Reasons Credit Spreads Are Set to Stay Tight_7

Six Reasons Credit Spreads Are Set to Stay Tight_7

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Risk Warnings and Disclaimers

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Alex

Forex

Economic

Korean investors have purchased nearly 1 trillion won ($7.5 million) worth of dividend-focused exchange-traded funds (ETFs) comprised solely of U.S. companies. The figure is more than four times the amount invested in domestic dividend ETFs.

According to data from market tracker FnGuide, Friday, retail investors here purchased a total of 935 billion won worth of ETFs tracking the Dow Jones U.S. Dividend 100 Index from Samsung Asset Management, Mirae Asset Global Investments, Shinhan Asset Management, and Korea Investment Management this year.

These ETFs are the Korean counterparts to the well-known SCHD ETF (Schwab U.S. Dividend Equity ETF).

In contrast, retail investors net purchased only 206.6 billion won worth of 14 domestic dividend ETF products during the same period.

Analysts noted that investors favoring dividend investments are directing substantial funds into U.S. ETFs rather than Korean ones, due to a perception that U.S. shareholder returns are more reliable.

In addition to stable dividends, U.S. dividend stocks offer the potential for capital gains from stock price increases. For instance, the stock price of Lockheed Martin, which has the largest weighting in the U.S. ETFs, has nearly quadrupled over the past decade.

Other factors attracting Korean investors is the fact that, unlike Korea, where high-dividend stocks are mostly concentrated in the financial and securities sectors, U.S. ETFs offer the advantage of diversification across various sectors such as defense, biotechnology and food.

“There is a clear trend of preferring U.S.-centric investments, not only for capital gains, but also for dividend-related ETFs,” an official in the asset management industry said.

“This trend has led to intensifying competition for U.S.-focused ETFs.”

The growing popularity of U.S. ETFs is challenging the Korean government’s Corporate Value-up Program, which aims to encourage local listed firms to enhance their capacities. Launched in late February, this initiative is part of efforts to address the so-called Korea discount, where Korean shares are sold at prices lower than their fundamentals.

The government has urged businesses to increase dividends to improve shareholder returns as part of the value-up initiative, but progress has been slow. Of the approximately 2,500 listed companies in the country, only 17 have announced value-up plans so far.

Source: Koreatimes

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Risk Warnings and Disclaimers

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Justin

Economic

There are some strong comments coming through from Chair Powell at his Jackson Hole speech. We get the usual bits and pieces about inflation looking better and the focus is now much more on jobs, but he is as categorical as he can be with the statement "The time has come for policy to adjust. The direction of travel is clear". This follows on from the minutes to the July FOMC meeting, released on Wednesday, that said “the vast majority [of FOMC members] observed that, if the data continued to come in about as expected, it would likely be appropriate to ease policy at the next meeting”.

There is no discussion of 25bp or 50bp at the September FOMC meeting – merely that "the timing and pace of rate cuts will depend on incoming data, the evolving outlook, and the balance of risks". Nonetheless, he does allude to the fact that they could cut rates a lot should conditions warrant it – "The current level of our policy rate gives us ample room to respond to any risks we may face, including the risk of unwelcome further weakening in labor market conditions."

There is currently around 33bp of cuts priced for the 18 September FOMC meeting and 100bp by year-end with a further 125bp of cuts next year. That looks fair given the current situation. between now and the 18 September decision we have the core PCE deflator (30 August), which the market is confident on a 0.2% month-on-month print given the inputs from CPI and PPI. Then it is the jobs report on 6 September and that is the critical one. Note Powell today stated that “we don’t seek or welcome further cooling in labour market conditions”.

If we get a sub 100k on payrolls and the unemployment rate ticking up to 4.4% or even 4.5% then 50bp looks more likely. If payrolls comes in around the 150k mark and unemployment rate stays at 4.3% or dips to 4.2% we can safely say it will be a 25bp. Then on 11 September it is core CPI. 0.2% MoM or lower looks likely there – we are currently leaning in the direction of a possible 0.1% on the potential for the jump in July primary rents to reverse.

Source:ING

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Risk Warnings and Disclaimers

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Kevin Du

Energy

Electricity generation from solar farms is growing faster in Central and Eastern Europe than in any other European region, vastly exceeding the growth rates seen in both wealthier and sunnier parts of the continent.

Through the first seven months of 2024, utility-run solar output in the five largest solar producers in Central/Eastern Europe - Austria, Bulgaria, Hungary, Romania and Poland - jumped by 55% from the same months in 2023, data from Ember shows.

That's over twice the growth rate for Europe as a whole, and sharply exceeds the paces posted by the five largest solar generators in Western Europe, Southern Europe and Northern Europe over the same period. Poland and Hungary Become Key New Drivers of Europe's Solar Growth_1

Poland and Hungary Become Key New Drivers of Europe's Solar Growth_1

Central and Eastern Europe's top five solar producers have also expanded solar generation capacity faster than regional peers since 2019, paving the way to continued solar output growth in one of Europe's most heavily industrialized areas.

Driving Forces

Poland and Hungary are by far the most important drivers of utility-scale solar growth in Central/Eastern Europe.

Through the first seven months of the year, solar-powered electricity generation in Poland was 11.3 Terawatt hours (TWh) and was 5.8 TWh in Hungary.

Those output figures were up 33.3% and 47.7%, respectively, from the same periods in 2023, according to Ember, and rank among the fastest growth rates in all of Europe.

In absolute generation terms, those output figures also rank highly among European peers.

Indeed, the five largest solar producers in the Central/Eastern European region boosted collective solar-generated electricity by just 10% less so far this year than the five largest solar producers in Western Europe - Belgium, France, Germany, The Netherlands and Switzerland.

The ability of nations across Central/Eastern Europe to compete with wealthier economies in Western Europe in terms of solar growth underscores how affordable solar installations have become relative to other forms of electricity generation.

Poland and Hungary Become Key New Drivers of Europe's Solar Growth_2

The rapid growth in solar generation in Central/Eastern Europe also reflects supportive clean energy policies across the region, which has historically been one of Europe's heaviest coal-burning regions.

Both Poland and Hungary - the region's two largest solar producers - have targeted net zero carbon emissions in power generation by mid-century, and plan aggressive further expansions in clean energy generation.

Climbing The Generation Ranks

In absolute generation terms, the five largest solar producers in Central/Eastern Europe still rank a distant third in the region behind the five largest solar producers in Western and Southern Europe.

Through the first seven months of 2024, Western Europe's largest solar producers generated 83.53 TWh of electricity, while Southern Europe's five largest solar producers - Greece, Italy, Portugal, Spain and Turkey - generated 76.12 TWh, Ember data shows.

The 25.2 TWh of solar electricity generated by Central and Europe's five largest solar producers looks small comparatively.

However, over the past three years the Central/Eastern European region has boosted solar generation by roughly 49% a year, which dwarfs the 19% annual growth pace for Europe as a whole, the 16% pace of Western Europe, and the 21% for Southern Europe.

If those growth rates were sustained for the rest of this decade, the generation total by the five largest Central and Eastern solar producers would surpass that of their peers in Western Europe in 2029 and those of Southern Europe in 2030.

Further Gains

The largest solar producers in Central/Eastern Europe already produce 76% more solar electricity than their peers in Northern Europe (Denmark, Finland, Lithuania, Sweden and the United Kingdom), and look primed for further aggressive solar growth across the region.

Operations at the 60 megawatt (MW) capacity Tapolca solar farm in western Hungary began in late July, and will supply roughly enough electricity for 30,000 households annually, according to developer Enlight.

And in Poland, a new 40 MW project developed by Lightsource BP commenced operations last month.

The region's largest project, however, is the 400 MW farm in Apriltsi, Bulgaria, which boasts over 800,000 photovoltaic panels and is designed to supply electricity not just to Bulgarian customers but across Eastern Europe.

And beyond being one of the biggest solar parks in Europe, the Apriltsi project is also significant for the height of its panels, which at 2.2 meters (7.2 feet) allow for the land below to be used for agriculture purposes.

Further so-called agrivoltaic projects are being trialled in Turkey and Poland, and look set to yield additional clean electricity generation with only limited impact the region's farmland.

And given the strong local policy support for traditional solar already in place, the successful deployment of more agrisolar projects could help the Central/Eastern Europe region gather even more solar generation momentum in the years ahead.

Source: Reuters

Risk Warnings and Disclaimers

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Alex

Economic

US Vice President Kamala Harris might be riding a wave of momentum heading into her acceptance speech as the Democratic Party's presidential nominee on Thursday, but the economy remains the paramount issue in this year's race.

"This election, the outcome is going to be determined by how people vote with their wallets based on inflation," Ryan Sweet, chief US economist at Oxford Economics, told reporters last week.

According to an ABC News/Washington Post/Ipsos poll, her Republican rival Donald Trump holds a nine-point lead when it comes to who Americans trust more to handle the economy and inflation. Meanwhile, a poll released by the Financial Times and the University of Michigan Ross School of Business showed Ms. Harris with a one-point advantage.

The election's outcome will have significant effects on the economy with the Federal Reserve's inflation battle still being fought and the expiration of Mr. Trump's tax cuts next year that will be fiercely debated in Congress.

Both candidates have been on the campaign trail in the past week laying out their agendas – Ms. Harris with an appearance last Friday in North Carolina, and Mr. Trump with a speech in the battleground state of Pennsylvania on Monday.

Inflation and interest rates

The inflation scenario varies, with economists agreeing Mr. Trump's protectionism and immigration policies will stall progress in restoring price stability.

Mr. Trump has recently proposed a 10 per cent tariff on all US trading partners – as well as a 60 per cent tariff on Chinese goods – as a replacement to income taxes.

A recent paper from the Peterson Institute of International Economics said higher tariffs would harm US exports and diminish economic growth, while also leading to higher inflation. A separate study by the Lombard Odier Group predicts that a Trump presidency and a Republican-controlled Congress would also stall inflation, forcing the Federal Reserve to halt cutting interest rates at around 4 per cent.

"In the event of a Trump presidency with a divided Congress, the impact of tariffs would likely dominate, slowing growth while still increasing inflation," the group wrote in its latest CIO Office Viewpoint.

How Would a Harris or Trump Administration Affect the US Economy?_1

The current target range for US interest rates is 5.25 to 5.50 per cent.

Bond yields would also probably rise, and so would the US dollar against the euro, the organisation said. The company expected a Harris-led presidency to have greater policy continuity should she succeed Mr. Biden, with the Fed cutting rates through mid-2025.

Changes to the Fed's monetary policy will have implications for most central banks in the Gulf Co-operation Council, whose currencies are pegged to the US dollar.

"Any drop in the benchmark interest rates or higher-for-longer scenario will have an impact on interest rate-sensitive sectors in the GCC like banking, real estate, utilities as well as leverage companies," said Faisal Hasan, chief investment officer at Al Mal Capital in Dubai.

"The investors here are also very international [in their focus] and changes in the monetary policy will impact their investment."

Tariq Qaqish, chief executive at the Salt Fund Placement advisory firm in Dubai, said GCC countries must prepare for both administrations.

Mr. Qaqish anticipates a Trump win would lead to a weaker dollar, thereby increasing liquidity into the region. A Harris win, he said, would lead to a stronger US dollar which would hamper economic growth.

Federal deficit

Regardless of who wins the 2024 election, the US federal deficit is expected to further increase.

The International Monetary Fund has warned that high fiscal deficits and the continuing increase in the debt-to-GDP ratio are not only a risk for the US, but also the global economy.

Ms. Harris last week released some elements of her economic agenda, including expanding the child tax credit base from $2,000 to $3,000, expanding the earned income tax credit, advancing a federal ban on price-gouging on groceries and providing a tax credit of up to $25,000 for first-time homebuyers.

These and other plans make up the elements of the Agenda to Lower Costs for American Families, which outlines her intentions for her first 100 days in office.

All told, the plan would increase the US federal deficit by $1.7 trillion over a decade, according to the bipartisan Committee for a Responsible Federal Budget (CRFB). That figure would rise to $2 trillion if the housing policies became permanent.

Mr. Trump has thus far not released a detailed economic agenda. The CRFB in July estimated that his plans to eliminate taxes on Social Security benefits would increase deficits by $1.6 trillion to $1.8 trillion through 2035.

The national debt also soared during Mr. Trump's term in office.

According to another analysis conducted by the CRFB, Mr. Trump added $8.4 trillion to the national debt. Of that, $3.6 trillion was from Covid relief laws.

A second Trump term would likely be a continuation of the Make America Great Again agenda that defined his first term, where he wants further tax cuts and enhancing US industries, Mr. Qaqish said.

"These policies could stimulate growth but will put more pressure on fiscal deficits," he said, adding that geopolitical factors must also be considered. Should Mr. Trump win and negotiate a ceasefire between Russia and Ukraine, as well as a peace deal between Israel and Palestine, then Mr. Qaqish expects a lower level of government spending and national debt.

Corporate taxes in focus

In one major policy shift, Ms. Harris's campaign said her administration would lift the US corporate tax rate to 28 per cent from its current rate of 21 per cent. The campaign's proposal is in line with President Joe Biden's most recent budget proposal.

Mr. Qaqish said this would have a direct impact on investors, who would establish businesses outside the US to reduce their corporate taxes.

Mr. Trump cut the corporate tax rate from 35 per cent to 21 per cent as part of his 2017 tax plan, and pledged to further cut taxes if he was elected president again. Mr. Trump's tax plan brought the US's corporate income tax rate down from the fourth-highest in the world to roughly median, according to the Tax Foundation.

The non-partisan Congressional Budget Office (CBO) in 2018 said raising the current corporate tax rate by one percentage point would raise US revenue by $96 billion from 2019 to 2028.

Mr. Trump's tax plan is set to expire at the end of next year, and will be one of the biggest issues facing Congress when the new session begins.

Extending the tax cuts would add $3.3 trillion to the US deficit over the next 10 years, the CBO said.

Source: The National News

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Alex

Forex

Central Bank

Economic

The highly anticipated annual central bank conference - the Jackson Hole Economic Symposium - commenced on August 22 for a three-day duration. The complete agenda was released at 8 p.m. New York time on August 22. Each year, the schedule has some variations, but it typically includes panel discussions featuring central bank governors from around the globe, alongside officials from international organizations such as the International Monetary Fund (IMF) and the Bank for International Settlements (BIS). This year's theme, "Reassessing the Effectiveness and Transmission Mechanisms of Monetary Policy," underscores the significance of the event, particularly within the context of global economic recovery from the COVID-19 pandemic, elevated interest rates, and geopolitical tensions.

However, this year's "Global Central Bank Annual Meeting" appears to lack substantive participation, with only the Federal Reserve Chairman and the Governor of the Bank of England (BOE) confirmed to attend and speak. Notably, European Central Bank (ECB) President Christine Lagarde is expected to miss this year's meeting, with her place being taken by the ECB's Chief Economist, Philip Lane.

Powell will deliver a speech regarding the economic outlook via livestream, which is typically regarded as a keynote address. Bailey will present the luncheon speech, while Lane from the ECB is set to participate in a review panel discussion on Saturday, possibly engaging in dialogue with central bank governors from emerging markets and leaders of international organizations. Although Bank of Japan Governor Kazuo Ueda participated in panel discussions last year, he has been requested to attend a parliamentary meeting on the 23rd this year, and thus will not be present.

The most highly anticipated event is undoubtedly the address by Fed Chairman Powell, as he usually clarifies the "medium-term policy trajectory" during such meetings, even in the absence of actual policy announcements (for instance, during Bernanke's term, he would "forecast" new policies). This speech will also outline future areas of concern.

Fed's Performance in Previous Sessions

In recent years, the Fed has made erroneous assessments at crucial moments, but following a period of "reflection," it is evident that there has been "progress" in this regard.

During the tumultuous repurchase market of 2019, the Fed's interest rate management range once went out of control, ultimately requiring the revival of repurchase tools to provide liquidity. Notably, in his speeches that year, Powell failed to mention any aspect of the money market. The Fed's policy communication was heavily criticized, as reflected in a market survey conducted by the New York Fed, where only one primary dealer deemed the Fed's communication "relatively effective." Meanwhile, eight found it "average," eleven categorized it as "very ineffective," and four dismissed it as having "no (or low) effectiveness." Among the twenty-eight surveyed market participants, eight described the Fed's communication as "relatively effective," five considered it "average," seven labeled it as "very ineffective," and another seven identified it as having "no (or low) effectiveness," with only one participant rating it as "very effective."

The speech from 2020 was closely related to the adjustments in the Fed's framework at that time, establishing a foundation for monetary policy over the next decade. During his address, Powell extensively discussed the impact of the low productivity, low inflation, and low unemployment since the 2008 financial crisis on monetary policy. He referenced the well-explored concept of the flattening of the Phillips Curve, which seemingly justified the Fed's shift toward an average inflation-targeting regime. However, Powell clearly overlooked the onset of the pandemic in the same year and the aggressive shifts in fiscal policy. In reality, the post-pandemic era has numerous structural challenges for the labor market, while inflation has become exceptionally high and uncontrollable, making it difficult for the new framework to adapt to the current economic landscape and labor market conditions. Consequently, discussions on average inflation targeting had largely fallen by the wayside, and the highly politically correct notion of a "broad employment objective" within the new framework has become nearly forgotten.

By 2021, when the meeting convened, inflation in the U.S. had already begun to rise, while fiscal stimulus efforts continued at a significant scale from 2020. In his speech, Powell emphasized that "inflation is transitory", attempting to substantiate this claim with five key arguments and extensive elaboration to convey that inflation was manageable within the Fed's control and that a decrease would occur by the year's end. The subsequent developments are well-known; not only did inflation fail to decline, but it continued to rise.

In the 2022 speech, it was evident that Powell learned from previous experiences, particularly from 2021, and firmly established a notably hawkish tone regarding the "medium-term policy path," characterized by "slower, longer, and higher."

Fed Chairman Powell underscored the necessity of addressing inflation while also noting the deceleration of the labor market and economic growth. Many developments aligned with expectations; however, the requirement to maintain interest rates below 4% by 2023 seems to be significantly at odds with the current rate levels in the context of employment elasticity.

Overall, the decisions made by the Fed appear to be correct. Therefore, this meeting has humorously been dubbed the "Fed's moment of self-reflection." It is worth mentioning that the theme of the Jackson Hole Economic Symposium in 2022 was "Reassessing Constraints on the Economy and Policy," which closely resembles this year's theme.

In 2023, the persistent inflationary pressures, uncertainties surrounding the economic recovery process, and fluctuations in the global economic environment have set the primary tone. During this meeting, Powell's remarks predominantly focused on inflation and the economy, while also underscoring the importance of maintaining a hawkish stance and not ruling out the possibility of future interest rate hikes. Overall, there is greater caution regarding the approach to inflation.

Whether the Fed's policy in 2023 is "correct" depends on whether inflation has effectively come down, but also takes into account the performance of economic growth and the job market. From the current point of view, it is undoubtedly correct.

Challenges Faced by the Fed

Since the beginning of this year, the Fed has faced a number of challenges. Initially, inflation showed signs of rebounding, leading both the market and the Fed to view this as merely a "bump" in the disinflation process. However, after three consecutive months of increasing inflation, market sentiment began to shift - from perceiving it as a "bump" to acknowledging a rebound in inflation, then recognizing a stall in the disinflation efforts, and ultimately interpreting it as a reversal in inflation trends. Fortunately, starting from the April CPI, the market gradually began to believe that the disinflation process was progressing sustainably.

However, just as the inflation issue seemed to be resolving, complications arose in the labor market. The unemployment rate in the non-farm payrolls for May and June began to climb, reaching 4.3% in July - the highest level since October 2021, and almost triggering the "Sahm Rule." According to the Sahm Rule, if the unemployment rate (based on a three-month SMA) rises by 0.5 percentage points above its low from the previous year, a recession has begun. This indicator has accurately predicted economic downturns 100% of the time since 1970. Consequently, concerns over a potential recession began to permeate the market. The Fed explained that the rise in the July non-farm unemployment rate was likely attributed to an increase in the labor force population coupled with a decrease in hiring demand. It was only through comments from several Fed officials and the recent positive performance of various economic data that worries about a recession began to dissipate.

Early Signals of a Cut?

Throughout this process, whether dealing with inflation or labor market issues, the Fed has been actively guiding expectations through "expectation management." However, despite these efforts, the market still anticipates a 100-basis-point rate cut by the Fed by the end of the year. Judging from the speeches made by two FOMC officials at the Jackson Hole Economic Symposium yesterday, one supports a rate cut, while the other agrees with discussing the magnitude of the cut.

Boston Fed President Susan Collins stated that it would soon be appropriate to start cutting rates to help maintain a still-healthy labor market.

Philadelphia Fed President Patrick Harker mentioned that upcoming economic data in the next few weeks will help determine the appropriate magnitude of the first rate cut. He emphasized the need to review several weeks of data before deciding whether a 25 or 50 basis point rate cut is warranted in September.

From these two officials' remarks, it appears that the Fed has reached a consensus internally on the timing of rate cuts, but there is still disagreement over the magnitude of the cuts. This is one of the main reasons the market is focusing so closely on Fed Chair Jerome Powell's speech.

Considering the Fed's performance in the last two meetings and its recent attitude, Powell's speech might not be as hawkish as the market expects, as the market often likes to "jump the gun," which is not what Powell wants to see. Another piece of evidence supporting this is the previous remarks made by the two officials—one hawkish and one dovish (relatively speaking)—which seems to serve as a "precaution" for the market.

The market might hear more comments similar to those made in early August, such as avoiding reactions to single-month data and continuing to observe the broader trends. Key data like the PCE (Personal Consumption Expenditures) and the August non-farm payroll report will be released shortly after the Jackson Hole Economic Symposium, which may emphasize the need to wait for these data before deciding on the extent of easing required.

Simultaneously, there might be assurances that if the economy takes a more severe downturn, the Fed is prepared to act swiftly.

In summary, Powell might not be ambiguous about the direction but will indicate that the speed and timing of rate cuts will depend on the data between now and the next meeting. According to the minutes from the July meeting, unless unexpected events occur, the "vast majority" of members support a rate cut in September. The remaining question is whether the cut will be 25 or 50 basis points. This is actually somewhat predictable, with regional Fed Presidents like Harker being reluctant to reveal specifics, let alone Powell.

A 50bp Cut Theoretically Feasible?

There are other clues suggesting that a 50 basis point rate cut might be feasible. Although the U.S. economy is currently weakening, the real economy has not yet experienced a crisis. At the same time, considering the risk of inflation possibly rebounding—especially as the economy may further recover after a rate cut—the Fed might still be concerned about inflation rising again. Therefore, the Fed may take a more cautious approach, opting for a 25 basis point cut as an initial move, rather than being too aggressive at the outset.

However, from the perspective of benefiting the economy and financial markets, a larger 50 basis point cut might be more advantageous. A key question regarding the current understanding of the U.S. economy is: Why hasn't the U.S. economy entered a recession after such a rapid rate hike to high levels? So far, there hasn't been a substantial financial recession in the U.S. The main reason behind this is that financial institutions and the government have protected the household and corporate sectors by taking on risks themselves. Therefore, during the entire rate hike process in the U.S., the accumulated risk has been more financial rather than a risk to economic growth.

The current liquidity in the U.S. is not lacking; it's just that the cost of funds is relatively high. Based on this, we believe that a more substantial, preventive rate cut would be more effective in alleviating financial risks. Otherwise, high interest rates might not truly resolve the risks.

This is why some officials, such as Harker, are open to a 50 basis point rate cut. In theory, the current environment in the U.S. supports a 50 basis point rate cut by the Fed, but due to uncertainties, in practice, the Fed might lean towards a more cautious 25 basis point cut as a more realistic initial step.

Additionally, as mentioned earlier, the Fed has made misjudgments during this economic cycle, mainly in underestimating the persistence of inflation in its early stages. Powell initially believed that inflation was temporary, but it turned out he was wrong. Late last year and early this year, the Fed thought that inflation had dropped to a level where rate cuts could be considered, but subsequent events proved this judgment wrong again. In other words, the Fed's misjudgments have more to do with the resilience of the economy rather than whether it has entered a recession. The robust growth of the U.S. economy in this cycle has actually given the Fed considerable confidence.

Although there has been a slight deterioration in the employment situation, it is unlikely to evolve into a large-scale recession. Therefore, discussing whether it is too late to cut rates might be inaccurate. Employment data from the first or second quarter, or even GDP growth, were somewhat overheated. The Fed might choose to delay the rate cut and proceed cautiously.

Even if a rate cut occurs in September, it might be more of a preventive measure rather than a crisis response. With non-farm payrolls not showing a sharp decline and the Fed still having substantial policy space, the notion of a rate cut being too late might not hold. Instead, the market’s anticipation and demand for a rate cut might be premature.

As for the impact on the U.S. Dollar Index, it is expected to decline, but the drop may be limited. Although Powell might clarify the policy direction at this meeting, the market has already priced this in. Considering the market's tendency to anticipate prematurely, Powell might be more cautious in his wording, which could disappoint some investors who are looking for signs of a 50 basis point rate cut. This could provide upward momentum for the dollar, but ultimately, due to a clear policy direction, the dollar index is likely to end lower.

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