Powell's Jackson Hole address fuels expectations of a September rate cut

In focus today

• In the euro area, focus turns towards the German Ifo indicator. It will be important to see if it shows the same improvement in the manufacturing sector like the PMIs did last week.
• In terms of other data releases, today is a quiet day with no significant market movers.

Economic and market news

What happened Friday and over the weekend

In the US, at the Jackson Hole conference on Friday, Federal Reserve Chair Powell signalled a potential rate cut at the September meeting. At the conference, Powell discussed the risk of persistent inflation stemming from higher inflation expectations but appeared relatively more concerned about downside risks to labour markets. While the Fed chair did not pre-commit to anything, this is one of the clearest signals for a September rate cut one could have imagined, and markets reacted dovishly, with expectations for a 25bp cut rising to 80% after his remarks.

Other Fed speakers were not as convinced of the prospect of rate cuts. Cleveland Fed's Beth Hammack (non-voter) cautioned that the Fed is still "missing badly on the inflation mandate", while St. Louis Fed's Alberto Musalem (voter) said that the next jobs report 'may, or may not, be enough to justify a rate cut'. These comments place significant weight on the next monthly employment report, due on 5 September, ahead of the Fed's meeting on the 16-17 September.

In the euro area, negotiated wage growth rose to 3.95% y/y in Q2 from 2.5% y/y in Q1. There were no consensus expectations for Q2, but we did expect it to rise significantly due to the timing of one-off inflation compensation bonuses that effects the yearly growth rates. Compared to ECB's wage tracker that excludes one-off bonuses, the negotiated wages data generally follows the same downward trend despite the uptick in Q2. The negotiated wages indicator covers only the part of wages that is based on collective bargaining, thereby not painting the full picture of wage growth, which we get on 5 September.

In Sweden, the LFS survey data came in weaker than expected, with the unemployment rate (SA) rising to 8.9% (cons: 8.6, prior: 8.3%). The rise in unemployment was primarily driven by weaker employment (-0.4% m/m). the U4 unemployment rate, which includes discouraged workers no longer actively seeking employment, reached a new cycle high, further underlining the soft tone of Friday's release.

In geopolitics, Canadian PM Mark Carney met Ukrainian President Zelenskiy in Kyiv on Independence Day, backing Ukraine's call for NATO-like security guarantees in a future peace deal and stating that Canada would not rule out sending troops under such a framework. The two leaders signed a drone co-production agreement, while Carney announced over CAD 1bn in military aid. Trump's special envoy, Keith Kellogg, also attended and discussed security frameworks with Ukraine's PM. Furthermore, Ukrainian drone attacks on Sunday and earlier in the week targeted Russian oil and energy infrastructure raising concerns over potential disruptions to Russian oil supply which has contributed to pushing oil prices slightly higher.

Equities: Equities rallied on Friday as Powell struck a more dovish tone than expected. The reaction should, however, be seen in the context of the sell-off in the days leading up to the Jackson Hole conference. The S&P 500 gained 1.5% (securing another week of advances), while the small-cap Russell 2000 surged an impressive 3.9%, reflecting its sensitivity to interest rates. Among sectors, the pattern was the same: yield-sensitive areas such as homebuilders, retail, autos, and travel all advanced 3-4%. The momentum has not carried into today, with US futures slightly lower, though Asian markets are rallying in catch-up.

FI and FX: UST yields moved sharply lower on Friday afternoon when Fed Chair Powell hinted at upcoming rate cuts in his annual Jackson Hole speech, saying the current balance of risks 'may warrant adjusting policy stance'. Equity markets saw solid gains on Friday after Powell's remarks, and the positive sentiment continued in Asia overnight, although European and US equity futures are slightly lower ahead of the European open. Powell's speech also triggered broad dollar weakness, with EUR/USD rising from the 1.16-level to reach 1.1740 on Friday afternoon before settling around the 1.1700 level overnight. The "risk on" sentiment on Friday resulted in strengthening of both SEK and NOK with EUR/SEK now trading around 11.13 and EUR/NOK around 11.78 after trading as high as 11.98 on Wednesday.