The Fed will cut by at least 25 bp at the Sept meeting in 22 days

Outlook

Today the US agenda includes consumer confidence, June home prices, Richmond and Dallas Fed surveys, and a Treasury auction of $69 billion in 2-year notes. Not much here that ordinarily moves FX.

The consensus: the Fed will cut by at least 25 bp at the Sept meeting in 22 days. The CME FedWatch tool has 65.5% of bettors going for 25 bp and 34.5% for 50 bp. As noted yesterday, 50 bp might signal the Fed is scared and Mr. Powell prefers a winner’s circle to getting accused of belatedly acknowledging the Fed has been behind the curve.

Powell said “the downside risks to employment have increased.” Well, maybe, but only maybe. Granted, the gigantic revision to payrolls was an unhappy development, but ended in March and payrolls is a lousy metric, anyway. And it’s only one of many employment indicators. Challenger job cuts and layoffs are way down. And job openings, while lower than before, are still 7.9 million.

We suspect the new attention to employment is just an excuse to do what the Fed has wanted to do since last December, before it got thrown off course by Q1 inflation data.

Here is the list we have been showing for over a month:

Reasons for the Fed to Cut Rates.

Avoid embarrassment from getting inflation wrong twice.

Normalize the yield curve.

Head off any recessionary tendencies.

Help housing via mortgage rates.

Help banks rollover commercial property loans.

Help the stock market, especially smaller companies (with debt).

Synchronize with the ECB (and Riksbank and SNB).

To this list Mr. Powell would have us add “prevent the labor market from further cooling.”

Analysts and traders can interpret data only in the context of their preconceptions. The Fed is setting them up—conning them—to see labor market weakness. This will, presumably, feed the 50 bp narrative.

We will get the next payrolls release on Sept 6. We had 206 k in June, 114 k in July and Trading economics forecasts 100 k in August. This looks terrible but will be modified later on by schoolteachers returning, many corporate fiscal years ending Oct 31, and eleventy-seven other oddball and seasonal factors, including many projects delayed because of the extraordinary heat wave (our new roof had to be postponed from August to September because you can’t ask workmen to do hard labor when it’s 110 degrees).  

A single cut in September, okay. But to forecast multiple cuts off the total amount of labor market this data seems unjustified.

Also unjustified is the pound shooting the moon on comments by BoE Gov Bailey that it’s “too soon to declare victory over inflation.” Sterling flew up to a high of 1.3247 overnight, the highest since April 2022, on the comparison with Powell. 

Forecast: We are stuck with confirmation bias (the Fed says it wants to prevent the labor market cooling) and it can take a real Shock to shake traders out of it. A big move up in the core PCE would do the trick. We continue to think a reality check is overdue. When it comes, the dollar-selling will reverse. That doesn’t mean it won’t start up again,. but just unloading short positions will deliver a spike. Be afraid.

Note to Readers: We will not publish any reports on Thursday or Friday next week ahead of the Labor Day holiday on Monday, Sept 2. 

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