London Pre-Open: Stocks Seen Up Ahead of Powell Speech

Stocks

Summary:

London stocks were set to open higher, with the FTSE 100 up around 35 points, as investors awaited Fed Chair Powell's Jackson Hole speech, which may temper rate cut expectations.

London stocks were set to gain at the open on Friday as investors eyed a speech by Federal Reserve chairman Jerome Powell at Jackson Hole.

The FTSE 100 was called to open around 35 points higher.

Ipek Ozkardeskaya, senior analyst at Swissquote Bank, said Powell is expected "to douse the jumbo rate cut expectations because there is no reason for the Fed to start cutting the interest rates by big chunks in the absence of a severe economic slowdown, market stress, or a crisis".

"This is at least what the data suggests and what other Fed members nudge toward, as well," she added.

"The swap markets continue to price in around 95bp cut from the Fed from September to the end of the year. A this-size cut means that the Fed should cut its rates every time it meets this year and cut by 50bp in one of the meetings. From where we stand right now, it seems more likely that this will not happen than the opposite.

"Therefore, the pricing must readjust to match at least a 75bp cut by the year end. The real risk here - for the doves - is if the Fed starts cutting rates in September and decides to pause - like did the European Central Bank (ECB) in July for example.

"If that’s the case, if there is a pause to Fed rate cuts in November, then the year will end with only a 50bp cut for the Fed - and that could weigh heavier on risk appetite and give a serious positive jolt to the US dollar."

On home shores, a survey out earlier from GfK showed that consumer confidence remained stable in August, as improving sentiment towards personal finances was offset by the first fall in economic expectations in six months.

The GfK Consumer Confidence Barometer came in at -13, in line with the July reading and up from -25 in August of last year.

Three of the five sub-indices of the survey measuring people's personal finances improved in August while two measuring sentiment towards the economic environment worsened.

Notably, the sub-index measuring sentiment towards people's personal financial situation over the next 12 months jumped by three points to +6, which GfK client strategy director Joe Staton said could be due to the recent Bank of England interest-rate cut "and hopes of more to come".

Meanwhile, the major purchase index, which tracks the public's confidence in making major purchases such as furniture or electrical goods, improved to -13 from -16.

"The three-point jump in the major purchase index is great news for retailers with more shoppers agreeing that now is a good time to buy big-ticket items," Staton said.

However, two sub-indices measuring consumers' views on the economic situation both declined further into negative territory, with economic sentiment for the coming year falling four points to -15 - the first drop since February.

Nevertheless, Staton said that all the key numbers this month are "significantly more encouraging" than 12 and 24 months ago. "But as we move into autumn and winter, how much further will this slow improvement in the mood of the nation run?"

In corporate news, Direct Line Insurance said that it had identified a miscalculation in its 2023 Solvency II own funds related to the reinsurance arrangement, which did not affect IFRS figures.

Correcting the error, the company said its year-end solvency capital ratio was revised from 197% to 188%, still above its risk appetite range.

The group said it anticipated a solvency capital ratio of around 200% by June, thanks to strong capital generation, and had implemented measures to strengthen its control environment.

Evoke announced the acquisition of New Gambling Solutions (NGS), which operates Winner.ro, making it the number four online betting and gaming operator in Romania by combining 888.ro with Winner.

It said the deal involved a €10m cash consideration for a 51% stake in the enlarged Romania business, with an option to increase ownership to 100% after three years.

The transaction aligned with Evoke's strategy to focus on high-growth, regulated markets, expected to enhance earnings and reduce leverage from 2025 onward, while positioning Romania as Evoke's fifth core market.

Source: Sharecast

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Forex

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EUR/GBP Analysis

The Bank of England slashed rates at the start of the month due to the steep deceleration in price pressures and fragile economic activity, in a move that sent EUR/GBP to the highest levels since April. However, the 5-4 split vote highlights the uncertainty around the intentions of policymakers and Governor Bailey warned that they "will need to be careful" to not lower rates "too quickly or by too much".

Although at least one more reduction seems reasonable within the year, a back-to-back move in September does not look easy, with the latest Reuters poll pointing to a hold. After two months at BoE's 2% target inflation picked up again in July as expected, while the economy is improving and pay growth remains high by historical standards despite significant moderation.

The European Central Bank was faster than its UK counterpart, as it lowered rates back in June. Although at last month's hold President Lagarde said the September decision is "wide open", another rate cut looks increasingly likely. Some of its colleagues like Mr Rehn pointed to such move this week. Despite exiting its brief recession the European economy remains weak, disinflation is on track and the latest data showed a substantial moderation in Q2 wage growth.

The monetary policy differential remains unfavorable for EUR/GBP, which runs its second straight losing week, moving below the EMA200 (black line). Bias is on the downside with scope for further losses towards the lower border of the daily Ichimoku cloud, although new 2024 lows will need fresh catalyst.

On the other hand, the ECB's next move if far from certain and recent inflation figures have shown persistence, while the BoE has a habit of surprising markets. Furthermore, the RSI pints to overbought conditions so a recovery effort would not be surprising, bust sustained strength looks hard under current conditions. EUR/GBP Falls Below Key Support on ECB Rate Cut Prospects_1

EUR/GBP Falls Below Key Support on ECB Rate Cut Prospects_1

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Warren Takunda

Stocks

Asian shares were mixed in muted trading Friday ahead of a speech by Federal Reserve Chair Jerome Powell that might deliver clues on how quickly and deeply the Fed may cut interest rates.

Japan’s benchmark Nikkei 225 rose 0.5% to 38,408.44. Australia’s S&P/ASX 200 slipped 0.1% to 8,017.10. South Korea’s Kospi edged down 0.1% to 2,704.79. Hong Kong’s Hang Seng slipped 0.4% to 17,569.38, while the Shanghai Composite gained 0.3% to 2,856.73.

Japan’s plans for interest rates were also closely watched. Bank of Japan Gov. Kazuo Ueda in his comments to parliament appeared to indicate more increases may be coming, but they would be gradual. The Bank of Japan was closely monitoring the recent gyrations in stock prices and currencies but saw recent wage increases as a positive sign, he said.

Japan’s economy was dragged down for years by deflation, a gradual decline in prices that reflects a stagnant economy. The bank ended negative interest rates in March then raised rates in July.

“We stuck to a very loose monetary policy until March. The point was our commitment to that until it’s confirmed the economy is on track to realize a gradual, stable rise in prices that’s sustainable,” Ueda told lawmakers.

Data is due next week on GDP, or gross domestic product, the value of a nation’s products and services, from the U.S., Canada, Germany and India.

On Wall Street, the S&P 500 fell 0.9% for its worst day following a two-week rally. The Dow Jones Industrial Average dropped 177 points, or 0.4%, and the Nasdaq composite sank 1.7%.

Weighing on stocks was a mixed picture on the U.S. economy, which has been slowing under the weight of high interest rates meant to get inflation under control.

One report showed slightly more U.S. workers applied for unemployment benefits last week than expected.

A second report suggested U.S. business activity remains deeply split. Growth for services businesses is accelerating, according to preliminary data from S&P Global Market Intelligence. But the country’s manufacturing sector appears to be contracting at a more severe rate.

“Growth has become increasingly dependent on the service sector as manufacturing, which often leads the economic cycle, has fallen into decline,” said Chris Williamson, chief business economist at S&P Global Market Intelligence.

The Fed has pulled its main interest rate to the highest level in more than two decades. With inflation slowing, the wide expectation is for the Federal Reserve to cut interest rates at its next meeting in September, which would be the first easing since the COVID-19 pandemic crash of 2020.

That’s why so much attention is on Jackson Hole, Wyoming, where Powell will speak Friday at an economic symposium that’s been home to big Fed policy announcements in the past.

One danger is if expectations for coming cuts have gone overboard among investors. U.S. companies continue to report mostly better-than-expected profits for the springtime.

Shares of Zoom Video Communications, one winner of the pandemic that saw its fortunes weaken afterward climbed 13% after delivering better results and revenue than expected.

Overall, more stocks fell on Wall Street than rose, including Nvidia, which was the heaviest single weight on the S&P 500.

All told, the S&P 500 fell 50.21 points to 5,570.64. The Dow dropped 177.71 to 40,712.78, and the Nasdaq lost 299.63 to 17,619.35.

In the bond market, the yield on the 10-year Treasury rose to 3.86% from 3.80% late Wednesday.

In energy trading, benchmark U.S. crude rose 9 cents to $73.10 a barrel. Brent crude, the international standard, rose 10 cents to $77.32 a barrel.

In currency trading, the U.S. dollar fell to 145.78 Japanese yen from 146.24 yen. The euro cost $1.1131, up from $1.1115.

Source: APNews

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Owen Li

Central Bank

(Aug 23): Bank of Japan (BOJ) Governor Kazuo Ueda on Friday reaffirmed his resolve to raise interest rates if inflation stayed on course to sustainably hit the 2% target, but warned financial markets remained unstable.

Ueda said the market volatility seen in early August was due to rising fears of a US recession, stoked by the country's weak economic data, while the BOJ's interest rate hike in July led to a sharp reversal of "one-sided yen falls".

"Markets at home and abroad remain unstable, so we will be highly vigilant to market developments for the time being," Ueda said in parliament, where he was summoned to explain the BOJ's decision in July to raise interest rates.

Ueda stressed the BOJ would scrutinise how market volatility and its decision to raise interest rates in July affect the economic and price outlook.

But he said there was "no change to the BOJ's basic stance to adjust the degree of monetary easing if it became convinced that economic and price developments were moving as forecast".

The remarks suggest the BOJ may spend more time than initially expected in considering its next rate hike, but stay on course to gradually hike borrowing costs from current still ultra-low levels.

"Japan's short-term rates are very low. If the economy is in good shape, they will move up to levels deemed neutral," Ueda said. But he added that there was "very high uncertainty on where rates will eventually rise to".

The BOJ ended negative interest rates in March and raised its short-term policy rate to 0.25% in July in landmark steps away from a decade-long radical stimulus programme.

In tightening policy in July, Ueda said the BOJ would raise rates further if inflation remains on track to durably hit its 2% target in coming years, as the board projects.

The surprise July rate hike and Ueda's hawkish signal triggered a market rout, forcing his deputy to offer dovish reassurances that no hikes would come until markets stabilise.

Ueda said volatile moves in the yen could affect the BOJ's median inflation projections, in which case the board would debate whether a policy shift was needed.

However, even if yen moves do not affect the BOJ's median forecasts, they could warrant changing policy if they posed big enough upside or downside risks to those projections, he said.

Source: The edge markets

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Devin

Forex

The UK pound has been putting in a strong performance across August.

At the same time, the British currency has been trading fairly steadily against the euro, with a euro worth around 85.37 pence.

"Currency markets are always a tricky one, both sides of every pair need to be looked at to try to understand moves," Matt Britzman, senior equity analyst at Hargreaves Lansdown told The National.

British Pound Strengthens on Political Stability and Dollar Weakness_1

As such, while currency trading is a stormy arena at the best of times, analysts say the weakness of the US dollar is providing a boost to both sterling and the euro at the moment, because of predictions the Federal Reserve will drop interest rates at a faster rate than had been previously forecast.

"The fact that (sterling) has moved against the US dollar this week is a function largely of the dollar weakness," said Jane Foley, head of FX strategy at Rabobank.

Richard Hunter, head of markets at Interactive Investor agreed, adding that the pound is also benefiting from events in Britain as well.

"The ongoing resilience of the UK economy also offers some support, while the fact that the Bank of England has already moved to reduce rates reflects confidence in inflation largely having been tamed," he told The National.

As such, the British pound has been the best-performing currency in the G10 group of nations so far this year, having risen about 2.3 per cent against the dollar.

Recent economic data has been relatively positive for the UK economy, with second-quarter growth increasing by 0.6 per cent, as last year's brief recession was well and truly placed in the rear-view mirror.

In addition, the new Labour government in the UK, which took over at the beginning of July, appears to have brought a sense of stability to the London markets for the time being.

Meanwhile, weaker-than-expected US non-farm payroll numbers released this month sparked a sell-off in global stocks and a corresponding rally in bonds as investors fretted that the US economy could be heading for a hard landing and a possible recession.

Interest rate divergence

All market eyes are now turning to the annual meeting of central bankers at Jackson Hole in Wyoming for further clues on the short-term future for US interest rates and corresponding movements in the dollar.

Bank of England governor Andrew Bailey is due to speak at Jackson Hole later on Thursday, with Fed chair Jerome Powell's speech scheduled for Friday.

"The future direction of currencies is extremely difficult to pin down, given the highly unpredictable macroeconomic trends which drive them," Laith Khalaf, head of investment analysis at AJ Bell told The National.

"However, interest rate policy in each jurisdiction will likely have a big influence, especially if it starts to diverge."

As such, divergence of interest rate policies is a key indicator of where the currencies will move relative to each other going forward.

The US Fed is expected to slash rates much more aggressively over the rest of 2024 than either the Bank of England or the European Central Bank (ECB), who've already started cutting rates in August and June. British Pound Strengthens on Political Stability and Dollar Weakness_2

British Pound Strengthens on Political Stability and Dollar Weakness_2

Traders now see 94 basis points of Fed cuts across its three remaining meetings this year – that implies three 0.25 per cent reductions, with a strong chance that one of them will be larger. In June and July, that basis point prediction was around 30 points lower.

"It's a rate differential story," said Commerzbank currency analyst Volkmar Baur.

"Inflation is coming down on both sides (of the Atlantic), but the Fed is expected to move a little bit more aggressively on the way down, and that closes the rate spreads a little bit and gives way for a stronger euro."

Source: The National News

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Swissquote

Central Bank

Economic

US stock markets sold off yesterday, as investors trimmed their long positions walking into Federal Reserve (Fed) Chair Jerome Powell’s Jackson Hole speech due later today – where he is expected to douse the jumbo rate cut expectations because there is no reason for the Fed to start cutting the interest rates by big chunks in the absence of a severe economic slowdown, market stress, or a crisis. This is at least what the data suggests and what other Fed members nudge toward, as well.

Kansas Fed President Schmid said he would like to see more data points before supporting rate cuts. Boston Fed’s Susan Collins said that the rate cuts should be ‘gradual and methodical’. And Philadelphia’s Harker made sure that everyone understood that ‘the Fed is going to ease – but no one is portraying a desire to ease bp at this time’. As such, the US 2-year yield rebounded to 4%, the 10-year yield settled near 3.85%, the US dollar index rebounded from the lowest levels since December and the major US indices fell. The S&P500 erased 0.90% while the technology-led Nasdaq 100 lost near 1.70%. The Russell 200 index fell almost 1%.

The swap markets continue to price in around 95bp cut from the Fed from September to the end of the year. A this-size cut means that the Fed should cut its rates every time it meets this year and cut by 50bp in one of the meetings. From where we stand right now, it seems more likely that this will not happen than the opposite. Therefore, the pricing must readjust to match at least a 75bp cut by the year end.

The real risk here – for the doves – is if the Fed starts cutting rates in September and decides to pause – like did the European Central Bank (ECB) in July for example. If that’s the case, if there is a pause to Fed rate cuts in November, then the year will end with only a 50bp cut for the Fed – and that could weigh heavier on risk appetite and give a serious positive jolt to the US dollar.

Data-wise

The numbers released yesterday were a mixed bag in the US. The jobless claims came in as expected, near 230K last week, and continuing claims rose less than expected, the US manufacturing activity slowed more than expected – and at the fastest speed this year, while US existing home sales rebounded.

Over in Europe, the Paris Olympics gave a temporary sugar shot to the French services – hence tilted the Eurozone PMI numbers to the upside, but filtering out the Olympics, the numbers looked gloomy. Figures from Germany, particularly the manufacturing index, confirm that the situation is still not improving for the Eurozone’s former growth engine. The soft data, along with a broad based rebound in the US dollar, pulled the EURUSD lower yesterday. The pair found support near the 1.11, but the support could be easily pulled out from under the euro bulls’ feet if Powell confirms that the rate cuts will be gradual in the US.

Across the Channel, Cable retreated yesterday after hitting a more-than-a-year high, yet the sterling selloff was softer as the PMI numbers printed the strongest growth in four months with cooling price pressures. The UK economy has been performing better than the major peers so far this year, and that’s a blessing for the pound that hasn’t seen the daylight since Brexit. But be careful, a part of the shine is due to the USD selloff, which is likely exaggerated and calls for correction.

Elsewhere, Bank of Japan (BoJ) Governor Ueda reaffirmed before the Japanese policymakers his envy to continue raising the rates if inflation remained sustainably above the 2% target – which is the case. Headline inflation remained steady near 2.8% for the third month and core inflation hit a 5-month high. Regarding the August shake, Ueda said that the volatility was due to the rising US recession odds triggered by the US’ own economic data and that the BoJ’s hike helped reversing the one-sided yen trades. The USDJPY didn’t react much, but the JPY bulls strengthen their position in expectation of further BoJ normalization.

Elsewhere, gold retreated below $2500 per ounce and US crude rebounded near the $72pb level, the August support, as dipbuyers preferred returning to the market on hope that rate cuts from major central banks could boost global oil demand.

Last word

What has been a calm week could see a last minute volatility with Powell’s Jackson Hole speech. Powell will probably not show up with a game-changing speech today, but his words should temper overpriced cut expectations. If that’s the case, we shall see the US dollar rebound from oversold levels, yet appetite in stocks could remain intact with prospects of lower rates into the year end.

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

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Warren Takunda

Economic

U.S. economic data is giving the Federal Reserve the green light to cut interest rates, financial markets are aligned for the first move, and the central bank all but gave the game away on Wednesday when a readout of its July meeting showed a "vast majority" of policymakers agreed the policy easing likely would begin next month.

With all that in place, Fed Chair Jerome Powell's goal in his keynote speech on Friday to the Kansas City Fed's annual Jackson Hole research conference may be less about further shaping expectations and more about assessing where the economy stands ahead of what he has called a "consequential" first step.

"I don't think he needs to do a lot beyond the press conference in July," said Richard Clarida, a former Fed vice chair who is now global economic adviser for Pimco, referring to how Powell leaned strongly toward a rate cut at the Sept. 17-18 meeting in remarks to reporters after the July 30-31 meeting.

"You will not get 'mission accomplished,'" Clarida said, "but he might look back at the last two years, where we were and where we are, and acknowledge that they are close" to taming the worst outbreak of inflation in 40 years.

Powell will take the podium at 10 a.m. EDT (1400 GMT) in a remote lodge in Wyoming's Grand Teton National Park to address a gathering that has become a global platform for central bank officials to shape views of monetary policy and the economy.

With one exception, the six speeches Powell has delivered to the conference since becoming Fed chief in 2018 have been largely explanatory, designed less to influence short-term policy expectations than to lay out how officials were thinking about major structural issues or, since the start of the COVID-19 pandemic, detailing the mechanics of inflation.

The exception was in 2022 as the Fed fought to keep public expectations about high inflation in check: Powell delivered a terse, market-moving address meant to convey his seriousness about defending the central bank's 2% inflation target. Some called it his "Volcker moment," a reference to Paul Volcker, the Fed chief who triggered a recession in the early 1980s with punishing interest rates to break an inflationary cycle.

With Fed Pivot in Hand, Powell May Opt for Broad-Brush Approach at Jackson Hole_1

REACTION FUNCTION

That's a consequence the Powell Fed has dodged - so far. Inflation crested at levels not seen since the Volcker era and two years later is roughly half a percentage point above target. The unemployment rate, at 4.3%, is well below its 5.7% long-run average. And financial markets seem in sync with where the Fed is heading.

In light of that, former Fed staff, policymakers and outside analysts said Powell may well revert to his explanatory norm, perhaps sketching out in broad terms how the central bank will approach its coming easing cycle or delving into lessons learned over two years about inflation's causes and cures.

The conference theme - how monetary policy impacts the economy - would fit either.

William English, a former head of the Fed's monetary affairs division who is now a professor at the Yale School of Management, said he felt the moment called for a general outline about the approach to cutting rates.

Because Fed policymakers at next month's meeting will update their interest rate projections for this year and 2025, Powell won't want to provide detailed forward guidance about what's to come - a risk in itself for the possible market reaction it could trigger, or the possibility coming data could push in a different direction.

Powell instead could provide some background for the public and markets to understand how the Fed will respond as the economy evolves, English said. "Lets say the economy does not go as we expect. What would that mean for policy? ... What is it going to take to move faster or slower?"

With Fed Pivot in Hand, Powell May Opt for Broad-Brush Approach at Jackson Hole_2

THE OTHER MANDATE

Powell and other Fed officials have become fans of describing different economic scenarios, a strategy that allows them to provide a baseline outlook, but also convey uncertainty around what might happen and how different outcomes might cause them to react.

Some, for example, have begun to worry the economy is at a point where the unemployment rate could rise fast and far enough to derail the "soft-landing" from inflation that they thought was within reach.

Yet it is unclear how the Fed, at this point, thinks about "maximum employment" - one of its two goals alongside stable inflation - and the degree to which officials are willing to tolerate rising joblessness to wring another one quarter or one half of a percentage point from inflation.

Antulio Bomfim, a former special adviser to Powell and now the head of global macro for Northern Trust Asset Management's fixed-income team, agreed that the Fed chief will likely steer clear of short-term guidance in favor of a discussion about broader issues - perhaps trying to capture what the central bank has just lived through and how coming labor and inflation dynamics may differ from those before the pandemic.

"We're kind of at an inflection point for policy, potentially for the economy too ... Inflection points are very difficult to navigate," Bomfim said.

Open questions linger about the economy that's emerging, including whether inflation will prove a more persistent headache for central banks after years of running soft before the pandemic, and whether job market dynamics have shifted and may imply higher unemployment rates than the Fed thought it could achieve based on the economy's pre-COVID-19 performance.

With inflation being such a high priority "over the past couple of years, the Federal Reserve ... was behaving like a single mandate central bank," Bomfim said. "And now we are not just in the transition from hikes to cuts, but also transitioning back to what I would call a more normal state of affairs."