US EARLY MORNING: Index futures are lower and yields are higher ahead of key PCE data and Fed Chair Powell at Jackson Hole

SNAPSHOT: US index futures are lower by 0.2-0.4%, with the NQ underperforming as US yields climb by 1-5bps, with much of the underperformance coming along the long-end of the curve. The Dollar Index is a smidge firmer. The focus is on PCE data and the Fed’s gathering at Jackson Hole, both of which we preview below.

PCE: Before we hear from Fed Chair Powell at Jackson Hole, US PCE data for July will be released at 13:30BST/08:30EDT; the data is considered the Fed’s ‘preferred’ gauge of inflation. The consensus expects Core PCE prices to ease to a rate of 0.3% M/M (prev. 0.6%), and for the annual Core PCE measure to pare to 4.7% Y/Y (prev. 4.8%). The cooling in core prices would be in keeping with the themes seen in the US CPI Data for July. Credit Suisse has warned that although it would be encouraging to see a slowdown in core goods prices, some of the slowdown in July PCE data will be driven by temporary factors, like falling travel and transport prices; “a downside surprise is a welcome development, but persistent strength in shelter and service prices should keep core PCE inflation above the Fed’s 2.0% target at least through next year,” the bank writes. Meanwhile, Personal Income is seen rising 0.6% M/M, in line with the prior reading, and personal consumption is seen easing to a rate of +0.3% M/M from a previous +0.6%. “Income growth is likely to remain strong – a pickup in wages and above-trend job gains drove a large increase in aggregate labour income in July,” CS says, “we also expect consumer spending to show positive growth for a second-consecutive month after a sharp drop in May.”

JACKSON HOLE: Fed Chair Powell’s opening remarks at the Jackson Hole Economic Symposium are scheduled for 15:00BST/10:00EDT. There are three broad areas traders will be looking for comments on: The size of the September rate hike, what the Fed’s thinking is on where the terminal rate now lies, and how long the Fed will be staying at terminal.

SEPTEMBER HIKE SIZE: Traders are seeking clues on the size that the Fed will raise rates at the September 21st FOMC. Currently, the market is pricing around 40% chance of a 50bps rate rise, and a 60% chance of a 75bps move (the Federal Funds Rate target is presently at 2.25-2.50%, which the Fed considers neutral). However, Powell will likely reiterate that the Fed's decision will be based on incoming data within the context of its goal to bring inflation back down to target. Accordingly, the US jobs report on September 2nd and the US CPI Report on September 13th will be the prime catalysts, and therefore, there is a chance that Powell could disappoint on that front today.

TERMINAL RATE: Additionally, traders will be looking for clues on where the Fed now thinks the Terminal Rate is; in its June forecasts, the Fed estimated that this was between 3.75-4.00% (note: these forecasts will be updated at the September meeting). The question of where terminal is will help traders gauge where the 'pivot' from rate hikes, to rate cuts will be. There is also the question about how long the Fed will stay at Terminal; the recent Fed meeting minutes said "some participants indicated that, once the policy rate had reached a sufficiently restrictive level, it likely would be appropriate to maintain that level for some time to ensure that inflation was firmly on a path back to 2%." Analysts note that historically, the Fed has usually stayed at Terminal for between 3-15 months, with an average of around 6.5 months; this suggests that rate cuts could be a possibility in H2 2023. Money markets currently think the Fed will raise rates to 3.50-3.75% by the end of this year, and will have cut rates at least once by the end of 2023. 









26 Aug 2022 - 09:28- Research Sheet- Source: Newsquawk

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