Five fundamentals for the week: Fed fallout and end-of-month flows promise summer storms

US interest rates are coming down, but at what pace? The follow-up to Friday's big event at Jackson Hole kicks off the last week of August. Here is a preview of this week's big events.

1) Fed fallout: Worries about the economy, Fed independence, and rate cut size may follow Powell's speech

Standing ovation – participants at the Federal Reserve's (Fed) Jackson Hole Symposium cheered Chair Jerome Powell as he came on stage. Fellow central bankers showed support for one of their own, and markets also hailed him for the message.

Powell laid down a clear signal that interest rates are coming down, driven mostly by concerns about the weakness of the labor market. While the US Dollar's (USD) decline and the jump in Gold (XAU/USD) make sense, is the rise of Stocks justified? Slashing borrowing costs due to economic deterioration is not necessarily something to be cheerful about.

In the background, US President Donald Trump increased his pressure on Lisa Cook, a Fed Governor appointed by his predecessor. He threatened to fire Cook on allegations of mortgage fraud. If Trump succeeds in ousting her – probably not without a legal battle – he would have the chance to put more of his people at the central bank. That would raise fears about the Fed's independence.

With an interest rate cut in September a done deal, markets could speculate about the size: a 25 basis points move or a double-dose one? The Commander-in-Chief wants more.

2) US GDP may confirm the Q2 rebound

Thursday, 12:30 GMT. The initial read of Gross Domestic Product (GDP) for the second quarter showed that America's economy grew at an annualized pace of 3% in the second quarter. While that beat estimates of a 2.4% growth, the bounce came after the economy shrank 0.5% in the first three months of the year.

The updated read will be of high interest as recent economic data have been mixed and the overall growth rate for this year has been sub-2%, below the long-term average.

Apart from the headline, investors will also eye expansion in consumption, the main motor of the world's largest economy. Any significant change would rock markets.

3) Continuing Jobless Claims remain worrying

Thursday, 12:30 GMT. At the same time as the GDP report, the US releases weekly Initial Jobless Claims and Continuing Claims. Both rose last week, following a period of calm. At 235K, initial claims are still low, but the increase in continuing claims – those struggling outside the workforce for longer – is more concerning.

Another increase in Continuing Jobless Claims toward the two million mark would weigh on markets, while little change or a drop would provide some relief.

As always with simultaneous releases, GDP and jobs figures would need to go in the same direction to trigger a meaningful impact.

4) Core PCE set to edge higher

Friday, 12:30 GMT. The core Personal Consumption Expenditures (PCE) Price Index is the Fed's preferred gauge of inflation. It is released after the parallel Consumer Price Index (CPI) publication, allowing economists to calculate the outcome of the PCE data with substantial accuracy.

However, core PCE measure surprised to the upside with 2.8% YoY in May and June, showing that underlying inflation remains elevated. Will it continue rising? That would cool some of the market enthusiasm about an interest rate cut by the central bank.

The monthly figure rose by 0.3% in June, and the report for July is projected to repeat that number, representing an annualized increase of 3.6%, uncomfortably high.

5) End of Month flows

Friday, peaking at 15:00 GMT. Money managers have to adjust their portfolio allocations by the end of the month, and some wait for the last minute. This time, the last day of the month is on Friday, ahead of a long weekend in the US due to the Labor Day holiday on Monday, implying higher volatility.

Moreover, this is August, and that means liquidity is lower than usual, allowing for relatively small orders to trigger outsized market moves. 

Final Thoughts

Inflection points in markets and low liquidity may trigger surprising market moves. Trade with care.