UPCOMING EVENTS:

  • Monday: Fed Vice Chair Brainard.
  • Thursday: US ISM Manufacturing PMI.
  • Friday: US Labour Market Report.

The main event of the last week was of course Fed Chair Powell speech at the Jackson Hole Symposium. It was a roughly ten-minute-long speech, short, clear, and resolute. Inflation and price stability words were used extensively signalling a unique focus on that topic alone and to achieve their goal as Powell said they will “keep at it until the job is done”. He even mentioned that there will be “softening in labour market conditions and some pain for households and businesses”. The cost of bringing down inflation to target of course will require, ironically, a high price.

Moreover, Powell admitted that the bulk of inflation is demand-driven, and their tools are meant exactly to work on the aggregate demand side, so to bring back in balance the supply and demand, they will need to see “below trend growth”. He also cited ex Fed Chair Paul Volcker - famous for defeating inflation of the 70s with aggressive tightening - when talking about “keeping at it”, which is also a title of Volcker’s 2018 memoir published just before he died. In fact, Powell said “the historical record cautions strongly against prematurely loosening policy”, which is another reference to the 70s.

All in all, Powell basically “fixed” his “mistake” at the last FOMC press conference when his words of neutral rate unleashed a party in risk assets and a loosening in financial conditions and this could be also confirmed from his line "In current circumstances, with inflation running far above 2 percent and the labour market extremely tight, estimates of longer-run neutral are not a place to stop or pause."

As a consequence, in the forex space, the USD rallied hard. The combination of global slowdown, aggressive Fed and the safe haven status makes the USD the best currency for now and the trend should continue to be in its favour this week.

This week there will be two important reports: the US ISM Manufacturing PMI on Thursday and the US Labour Market Report (NFP) on Friday. So, it’s most likely that we will see USD strength into the second half of the week and then we may see some USD weakness if the data misses big to the downside as the market may still try some rally in risk as economic conditions worsen.

The US ISM Manufacturing PMI is expected to come at 52.0 from the prior 52.8. Leading indicators are pointing to further weakness in economic activity amid slowing growth and tighter monetary conditions. The market will be more focused on the prices paid component of course.

The US NFP is expected to show an increase in payrolls of 285K. The unemployment rate is expected to remain unchanged at 3.5%. The major focus will be on wages metrics with average hourly earnings expected to show an increase of 0.4% for the M/M figure and 5.3% for the Y/Y.

This article was written by Giuseppe Dellamotta.