Powell signals that Fed is likely to cut rates in September

The Fed Chairman, Jerome Powell, speaking at the Kansas City Fed’s annual symposium in Jackson Hole stated that “the time has come for policy to adjust”. Powell highlighted that he now had greater confidence that inflation was on a sustainable path towards the Fed’s 2% target, but that downside risks to employment had increased. Markets have widely interpreted these comments as a confirmation that the FOMC will likely cut rates at their September meeting. Powell gave no clues to the scale and timing of cuts after September however, reiterating that those would be data dependent. Comments made by two other Fed officials at Jackson Hole suggested that cuts should be “gradual”. Our own view has for some time now been that the Fed would start cutting in September, reducing rates by 25bps, followed by a further 25bps cut in Q4.

Other speakers at the Jackson Hole symposium included the Governor of the Bank of England, Andrew Bailey, who also expressed growing confidence that risks around persistent inflationary pressures were beginning to recede. Several members of the ECB governing council also highlighted that they would be likely to support a further cut to European lending rates at their next meeting in September.

UAE non-oil trade grew 11.2% y/y in the first half of 2024, reaching a value of AED 1.395 trillion. Underlying the headline trade figure was a 25% y/y gain in non-oil exports, and a 11.3% y/y rise in non-oil imports in H1. Dr Al Zeyoudi, Minister of State for Foreign Trade, highlighted that the UAE had seen significant growth in bilateral trade with India and Turkey, who are both CEPA partners. The UAE currently has 6 CEPA deals in force, with a host more either still in negotiation or nearing ratification.

US new home sales rose sharply in July, gaining 10.6% m/m, to reach their highest level since May 2023. The rise in sales appears to have been driven by a combination of an increase in the number of listings, attractive incentives from home builder and lower mortgage rates.

The People’s Bank of China elected to keep the one-year medium-term lending facility rate unchanged at 2.3%. The decision had been widely anticipated, with the bank having previously cut by 20bps in July.

Today’s Economic Data and Events

• 12:00 GE IFO Business climate (Aug)
• 16:30 US Durable goods orders (Jul). Forecast: 3.9% m/m

Fixed Income

• US treasury yields fell on Friday, following Jerome Powell’s speech at Jackson Hole. Yields on the 2yr fell 9bps to 3.9153%, while the 10yr dropped 5bps to 3.799%. Yields were also lower on a week-on-week basis, with the 2yr and 10yr yields down 13bps and 8bps, respectively.
• Government bond yields were generally lower across European markets at the close of trade on Friday. The 10yr UK Gilt declined 5bps to 3.9112%, while the 10yr Bund was 2bps lower at 2.223%.

FX

• The dollar fell to its lowest level since January on the back of Powell’s comments, with the spot index declining 0.8% on Friday. EURUSD gained 0.7% to 1.1112, while GBPUSD rose 0.94% to 1.3214. USDJPY fell 1.3% to 144.37.
• Commodity currencies also gained against the greenback on Friday. AUDUSD rose 1.34% to 0.6795, NZDUSD gained 1.6% to 0.6233, and USDCAD fell 0.78% to 1.3509.

Equities

• US equity markets gained on Friday, with Jerome Powell’s speech fueling rate cut bets. The Dow Jones gained 1.14% the S&P 500 rose 1.15% and the NASDAQ increased 1.47%. All three major indices were also higher relative to a week ago.
• European indices were similarly higher on Friday. The Eurostoxx 50 gained 0.5%, the CAC 40 gained 0.7%, and the DAX increased by just shy of 0.8%. The UK’s FTSE 100 closed 0.4% higher.
• Locally, the ADX was flat while the DFM fell 0.38%.

Commodities

• Oil prices gained for a second consecutive day on Friday, reversing some of the slump seen earlier in the week. Brent futures gained 2.3% to USD 79.02/b, while WTI added 2.5% to USD 74.83/b. Both benchmarks remained weaker on a week-on-week basis.
• Prices however increased in early morning trade, with geo-political tension in the Middle East ratcheting up once more over the weekend.