Markets await Powell's Jackson Hole speech later this week

In focus today

This week starts rather quietly on the data release front. The only event in our calendar is Fed's Waller (voting member) speaking this afternoon.

The Democratic National Convention kicks off today, and Kamala Harris is expected to be elected as the democratic presidential candidate later in the week.

Early Tuesday, China will announce Loan Prime Rates which is part of the policy tool kit. However, since they cut rates last month, we expect rates to stay unchanged for now. However, more easing is expected later in Q3 as the economy is struggling and PBOC has been awaiting that the Fed would start easing before cutting rates (to avoid downward pressure on the renminbi).

Tuesday, we look out for the Riksbank rate decision, where we expect the central bank to deliver its second rate cut in 2024. On Wednesday, minutes of the Fed's July meeting will be published. On Thursday, August flash PMIs are due for release from the euro area, US and UK. On Friday, markets will pay attention to Fed chair Powell's speech at the annual Jackson Hole Economic Policy Symposium. Early on Friday, we will receive Japanese inflation data.

Economic and market news

What happened over night

In the US, Fed's Daly (voting member) said that recent economic data has given her more confidence that inflation is under control, and that it is time to adjust interest rates from the current level. However, she mentioned that she would back a gradual decline, which sounds more like a 25bp rate cut, rather than a 50bp rate cut. Markets are sure that a rate cut will come in September, the only question is if it will be a 25bp or 50bp rate cut. We maintain our expectations for a 25bp rate cut.

At the end of last week Fed's Goolsbee (voting member) spoke about monetary policy and said that "You don't want to tighten any longer than you have to," and "..the reason you'd want to tighten is if you're afraid the economy is overheating, and this is not what an overheating economy looks like to me." Goolsbee did not say if he would push for a rate cut at the September meeting.

What happened on Friday

In the US, consumer sentiment came in slightly higher than expected in August. This speaks into the shift in the narrative about the US economy from last week, with inflation pressures easing, while consumer spending is holding up, compared to early August after the weaker-than-expected jobs report.

Market movements

Equities: Global equities were higher on Friday and have risen for the seventh consecutive day. It is tempting to declare the full-blown equity recovery as complete. The MSCI World Index is nearly back to its peak levels from mid-July, and the VIX has dropped below 15. As previously mentioned, the speed and continuity of this recovery have been surprising for us. The next steps should be much tougher for equities, as an improved growth outlook will be required to push indexes higher from here. In the US on Friday, Dow +0.2%, S&P 500 +0.2%, Nasdaq +0.2%, and Russell 2000 +0.3%. Asian markets are mixed this morning, while both European and US futures are showing gains.

FI: We could be in for a new test of 3.8% level in 10Y US Treasuries as well as the 4% level in the 2Y Treasuries if the PMI data released this week confirms the slowdown and we have dovish comments from the Federal Reserv'’s Jackson Hole conference this week.

FX: The USD faced broad weakness against G10 currencies on Friday, with the NZD emerging as the top performer. Safe-haven currencies, JPY and CHF also strengthened. EUR/USD rose above the 1.10 mark.