Written by Millan Chauhan
Last week, Jay Powell delivered his speech at the Federal Reserve’s (the Fed) annual economic symposium in Jackson Hole, Wyoming. Chairman Powell acknowledged that the “upside risks to inflation have diminished and the downside risks to employment have increased” and stated that the “time has come for policy to adjust”, indicating that policymakers would look to cut interest rates at their next meeting in September.
According to the CME FedWatch Tool, the probability of an interest rate cut is now 100% but the magnitude of the rate cut still remains in contention. The probability of a 25 basis points cut currently stands at 70% and the probability of a 50 basis points cut is at 30%. One of the major risks that remain is the speed at which future interest rate cuts are implemented. Whilst a 25 basis points is almost certain, the probability of a 50 basis points rate cut has risen substantially following Chairman Powell’s statement. The Fed’s preferred inflation metric which is the personal consumption expenditures index is expected to be released this Friday, with expectations of the core measure at 2.7%, on a year-over-year basis.
We also saw the release of the Fed’s meeting minutes which stated that the vast majority of participants expecting a September rate cut and that some officials preferred a July rate cut following weaker jobs data releases.
Following Chairman Powell’s comments at Jackson Hole on Friday, the likelihood of an interest rate cut increased which was a tailwind for smaller-capitalised stocks with the Russell 2000 index ending the week +1.3%, outperforming the S&P 500 index (larger-capitalised stocks), which returned -0.8% last week, both of which are in GBP terms.
In Europe, we saw business activity rise in August with the first estimate of the HCOB Eurozone Composite PMI Output Index coming in at 51.2, up from 50.2. The Paris Olympics was a major driver for the services sector however manufacturing production fell for the 17th month running. The governors of the Bank of Finland and the Bank of Italy commented that the case for the European Central Bank (ECB) to cut interest rates further in September has strengthened. Expectations now point towards two further rate cuts this calendar year. In July, the ECB voted to keep interest rates unchanged, but they were concerned about restricting future economic growth prospects.
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