September Rate Decisions Come Into Focus After Jackson Hole
Summary
Federal Reserve Chair Kevin Warsh used Jackson Hole to signal that further tightening may be needed if inflation does not move convincingly towards target
Markets responded by shifting back towards a September Fed rate increase, strengthening the dollar at the end of last week
The ECB is also approaching its September meeting with another increase under consideration, making Tuesday’s euro area inflation release important
Friday’s US employment report will provide the final major labour-market update before the Federal Reserve decides on rates
Jackson Hole changed the tone heading into September. Federal Reserve Chair Kevin Warsh said on Friday that policymakers would have “work to do” unless they became confident that inflation was moving clearly and quickly enough towards the Fed’s 2% target. Markets responded by moving from favouring unchanged rates in September to slightly favouring an increase, while the dollar recorded its strongest daily gain in more than two months.
The shift comes despite recent weakness in the US labour market. Payroll employment fell unexpectedly in July and earlier months were revised lower, while inflation remains above the Fed’s target. Friday’s August employment report will therefore be closely watched for evidence of whether the labour market is stabilising or continuing to soften. It is the final monthly jobs report before the Federal Reserve meets on 15–16 September.
Sterling enters the week after losing some momentum as expectations for another Bank of England increase this year eased. Governor Andrew Bailey told the Jackson Hole gathering that the second-round inflation effects from higher energy prices remained subdued for now, pointing in part to a softer labour market. The pound has a relatively quiet domestic calendar this week, leaving movements in US rates, the dollar and energy prices likely to play a larger role.
The euro faces a more immediate domestic test. The ECB’s account of its July meeting showed policymakers viewed that month’s decision to hold rates as a pause rather than the end of the tightening cycle. Another increase was considered likely unless the inflation outlook improved significantly. Euro area inflation stood at 2.9% in July, and Tuesday’s flash estimate for August will be the final inflation reading before the ECB meets on 9–10 September.
Energy prices add another complication. Oil rose sharply on Monday following renewed military exchanges between the United States and Iran, adding to concerns over supply through the Strait of Hormuz. Higher energy costs have already been an important part of the inflation outlook in Europe and the UK, and another sustained increase would make the decisions facing central banks more difficult.
Events to Watch This Week:
Tuesday 1 September: Euro area flash inflation for August; US JOLTS job openings
Thursday 3 September: US ISM Services PMI
Friday 4 September: US employment report for August
Friday’s employment report is the week’s key test for the dollar. Warsh has moved a September rate increase firmly back into consideration, but another weak labour-market reading could complicate that case. For the euro, Tuesday’s inflation figures could have similar significance ahead of the ECB decision the following week.
Speak to the Orbis dealing team ahead of this week’s key releases to discuss your upcoming transfers and the risk-management options available.
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