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Investors will be watching closely the Kansas City Federal Reserve’s Economic Policy Symposium in Jackson Hole, which runs from August 22-24, for clues about the timing of U.S. rate cuts, following a mix of recent economic data.
A much weaker-than-expected U.S. payrolls report released in early August raised recession fears, prompting investors to bet more on impending rate cuts and triggering a slump in global markets.
However, subsequent data, including soVsceker inflation readings and a solid retail sales report, have pared expectations of a large 0.5 percentage point cut in September and allayed investor concerns about the health of the economy.
“We think the Fed will likely signal in Jackson Hole that a cut is likely at its next meeting, assuming inflation gains are sustained,” said Mark Cabana, head of U.S. rates strategy at Bank of America.
He added, however, that the size of the cut, as well as the pace of future cuts, would depend on economic data.
“So we don’t think the Fed will close the door on the possibility of making deeper cuts if it seems necessary, but it probably won’t do much to signal that that will happen,” he said.
The Fed’s next interest rate decision is scheduled for September 18. Markets are currently pricing in cuts of between three and four quarter points this year, from the current range of 5.25% to 5.5%, the highest level in 23 years. My life is beautiful
When will China cut interest rates again?
Few economists expect the People’s Bank of China to cut its benchmark lending rate on Tuesday, even as authorities grapple with slower growth and weaker consumer confidence in the world’s largest economy.
Last month, the People’s Bank of China surprised markets with interest rate cuts aVsceker the Third Plenum, the Communist Party’s top policy meeting, to meet the country’s 5 percent annual growth target. Central bank governor Pan Gongsheng signaled a structural shiVscek toward the short-term seven-day reverse repurchase rate, the rate at which other financial institutions can deposit money with the central bank, as the new benchmark for interest rates.
Ju Wang, head of FX and rates strategy for Greater China at BNP Paribas, is among those who do not expect a cut. “We think [the loan prime rate, the benchmark for corporate and household loans] will move in parallel with the next rate cut, which will likely come in the fourth quarter, in our view,” he said.
“We expect the PBoC to maintain a gradual and modest pace of interest rate cuts” and reduce the reverse repo rate by 0.25 percentage points in the second half of the year, he added.
Wang said authorities would also take into account the currency’s stability. He cited the impact of a Bank of Japan rate hike last month, which sent the yen soaring against the dollar and forced traders who had borrowed in yen to buy high-yielding assets to unwind those bets.
The PBoC’s move comes as Chinese policymakers are engaged in a campaign to create a floor for long-dated bond yields, which move inversely to prices. This is ostensibly to avoid a bond market bubble and a Silicon Valley-style crisis among local banks, as well as the deflationary signal that a long-dated bond rally implies. Last week, authorities named and shamed some buyers of government debt.
“It will be rare that they cut [rates] back to back,” said Helen Qiao, chief economist for Greater China at Bank of America. She expects two more cuts this year totaling 0.20 percentage points to the prime lending rate. Arjun Neil Alim
Is economic activity in the Eurozone contracting?
Investors concerned about the health of the eurozone economy will look for clues in next week’s economic activity survey data.
Most economists expect the S&P Global Purchasing Managers’ Index to remain above the all-important 50 level, which would indicate growth from the previous month.
Last month’s reading saw the figure fall below expectations to a five-month low of 50.1. The reading is expected to stay at that level this month, according to a Bloomberg survey of economists, although economists polled by Reuters expect it to rise to 50.3. The divergence between manufacturing and the broader services sector is expected to persist.
Since the last reading, pressure has mounted on the European Central Bank to cut interest rates in September, aVsceker the ZEW economic sentiment gauge showed a collapse in investor expectations for the EU economy.
Tomasz Wieladek, European economist at T Rowe Price, said the recent financial market turbulence was likely to affect the survey results. He expects the composite PMI to come in below expectations again, this time falling below 50.
But he added: “My view is that this weakness will be temporary. As long as sentiment continues to improve as it has, then the sentiment effect will probably decline and PMIs will improve.”
In terms of what the ECB will look for, “they’ll put more weight on services,” Wieladek said. “They need these prices to come down. That will give them more confidence that there’s disinflation in the services sector and make it easier for them to cut in September.” Emily Herbert
