All eyes are on US Federal Reserve Chairman Jerome Powell’s speech today at 10 am ET (2 pm GMT). Powell’s speech comes at an important time for the US economy – with unemployment at levels not seen since late 2021 – and the Fed nearing a rate reduction after being on hold at 5.25%-5.50% for nearly a year.

Markets are currently pricing in -32 basis points of easing for September’s meeting and -97 basis points of cuts for the entire year. Consequently, investors expect at least one -50 basis point reduction and two -25 basis point cuts. It has been quite the year; we kicked off things at around -170 basis points of easing priced in, then down to just -25 basis points and now back up to -100 basis points of cuts.

Bloomberg WIRP

US Economy

There is considerable evidence of a softening jobs market in the US. Unemployment jumped to its highest level since late 2021, rising +4.3% in July (up from +4.1% in June). Employment growth also took a hit in July, adding only 114,000 new payrolls, down from the downwardly revised 179,000 reading in June. Additionally, wage growth slowed on a month-on-month and year-on-year basis. The broad weakness in job numbers sparked concerns of a recession and talks of emergency rate cuts.

However, regarding growth, the US is not in a recession just yet; the latest ‘advance’ estimate revealed real Gross Domestic Product (GDP) is growing at an annualised rate of +2.8% in Q2 24. Of note, the Atlanta Fed GDPNow forecasting model is also running at an annual rate of +2.0%. As such, -100 basis points of easing this year seems a little far-fetched.

Regarding price pressures, US inflation eased to +2.9% in the twelve months to July, down from +3.0% in June. The core year-on-year inflation measure, which excludes energy and food price components, came in as expected at +3.2% in July from +3.3% in June – this was the smallest increase in the core measure since April 2021.

FedSpeak

Fedspeak has been reasonably active ahead of today’s event. Given the weakening jobs market, most officials largely favour reducing the Fed funds rate at September’s meeting. According to the July minutes, most Fed members noted that ‘it would be appropriate’ to begin easing policy should data continue to come in as expected.

The FP Markets Research Team recently noted that Minneapolis Fed President Neel Kashkari is more open to lowering the Fed funds target rate in September, commenting: ‘The balance of risks has shifted, so the debate about potentially cutting rates in September is an appropriate one to have’. The Team also highlighted that Mary Daly, the San Francisco Fed President, echoed a similar vibe, noting a ‘gradual approach’ to lowering borrowing costs.

In addition to this, Philadelphia Fed President Patrick Harker recently made the airwaves and expressed support for a rate reduction in September; however, Harker stated that he needs to see a few more weeks of data before deciding whether he is in favour of a 25 or 50 basis point cut. Further adding support for easing policy was Boston Fed President Susan Collins, who commented that the economy is in a good place given slowing inflation and cooling jobs growth without ‘any red flags’.

Bearish Engulfing Candles for All!

Daily bearish engulfing candles were seen across major US equity indexes yesterday. You will note that support on the S&P 500 and the Dow Jones Industrial Average (DJIA) at 5,493 and 39,817, respectively, are joined by 50-day simple moving averages (SMA). Both indexes also demonstrate room for further selling towards the noted support levels.

Although both the Nasdaq 100 and the Nasdaq Composite ended Thursday in the shape of bearish engulfing candles, they are testing their 50-day SMAs at 19,496 and 17,633, respectively. Therefore, between these dynamic values and nearby supports at 19,244 and 17,551, the downside scope in these markets is limited for now.

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