Last month's Jackson Hole symposium came and went and little was learned from the press conference. US Federal Reserve chairman Jerome Powell suggested a taper could be on the cards this year, but it was his overall dovish stance that kept markets bullish.
The key takeaways are the Fed is in no rush to raise rates and it remains cautious on US employment growth. Markets liked the news, with equities rising and the US dollar and Treasury yields falling.
Judging by some key developments after Jackson Hole, we are increasingly solidifying a position where weaker economic data is becoming more supportive of stocks and, conversely, dollar negative.
The weaker economic data has stoked rallies on the possibility of a more accommodative Fed. However, improving economic data could yield fears the Fed will tighten its monetary policy.
Since Jackson Hole, we had the non-farm payrolls report, which was well below expectations at 243,000 (versus an estimated 665,000) and leaving overall unemployment unchanged at 5.2 per cent. Following two consecutive months of more than 900,000 gains, August’s report was disappointing.
The initial pick-up of jobs in the services sector since the re-opening of US businesses a few months ago has since stalled with no real job growth, particularly in the leisure, hospitality and education sectors.
With a portion of the labour force still content to not seek work, the mismatch between labour supply and labour demand will continue.
Despite the big miss, stocks continued to trade sideways and the greenback moved lower. Looking ahead, I expect a softer run of data points from the US and dovish Fed overtones to be supportive of markets in the interim.
Last week saw the release of the overall US gross domestic product print. Quarter-on-quarter growth came in at 6.6 per cent, slightly slower than expectations of 6.7 per cent. However, looking at the Atlanta Fed’s GDPNow tool, real GDP for the third quarter is expected to have slowed to 3.7 per cent at the start of September.
The GDPNow tool is not an official forecast of the Atlanta Fed; instead, it’s an estimate based on model-based projections and shows the running estimate of real GDP growth based on the latest US data points.
Following this downgrade of US growth forecasts, Morgan Stanley and Goldman Sachs both sharply revised growth forecasts downwards.
With this in mind, pay attention to upcoming data points this month: manufacturing and industrial production on September 15, followed by retail sales a day later. This culminates with the Federal Open Market Committee rate decision on September 22.
While the meeting may offer clarity on when the taper will begin, the Fed will maintain a dovish stance on rates, even more so considering the GDP argument made earlier. This may filter into its economic projections, which are due simultaneously.
Also watch for revisions to these growth forecasts and by how much interest rate projections are adjusted.
The interest rate figures will drop by 10pm UAE time. Expect volatility to be rife throughout the US session. It will perhaps be prudent to initiate any new positions only after confirmation of the Fed announcement late on September 22.
Finally, the European Central Bank convenes tomorrow. The ECB has been ramping up its hawkish talk recently and the rebound in the euro area over the summer has seen the Dubai Gold and Commodities Exchange EUR/USD futures contract edge up towards the 1.19 level.
While the ECB may look to slow its current asset purchase programme this week, it seems unlikely it is in a position to announce a further taper before the end of 2021. This could keep checks on any further upside moves in EUR/USD from the current channel.
Gaurav Kashyap is head of futures at EGM Futures. The views and opinions expressed in this article are those of the author and do not reflect the views of EGM Futures
