By Sebastian PARIS HORVITZ
Obviously, J. Powell’s statements at the Jackson Hole conference last week not only supported most assets, but will largely dominate traders’ behavior in the months ahead. Indeed, the Fed Chairman sounded the tocsin for the start of monetary easing in the USA, scheduled to begin in September. We’ve been waiting for this, as have most of the market.
Above all, J. Powell gave his reading grid for the reaction function of monetary policy in this phase of adjustment to lower key rates. From now on, the labor market situation will be his main compass. We were already expecting a gradual deterioration in the labor market, which justifies our three rate cuts between now and the end of the year. However, J. Powell seems to have little tolerance for a further rise in the unemployment rate, which could lead to an over-reaction in monetary policy. This surely explains, in part, the expectations of more aggressive rate cuts supported by the market.
Nevertheless, it’s important to stress that the appreciation of most major asset classes (with the stock market rising and sovereign bond yields falling sharply) has largely eased financial conditions for the US economy. In fact, they haven’t been this flexible since early 2022. Another factor contributing to this easing has been the dollar’s depreciation. This has been very abrupt, with the dollar reaching its lowest level in just over a year. As a result, the US economy is already being stimulated even before rate cuts begin. This should limit the risk of an abrupt downturn in growth.
Given recent fears of a rapid deterioration in the US economy, it is reassuring to see that consumer confidence, as measured by the Conference Board survey, continued to recover in August, returning to its February level. This is thanks in particular to a more favorable outlook, supported by expectations of price rises that are moderating. On the other hand, positive views on the employment situation continued to decline, although still at a high level.
In the Eurozone, the IFO survey for August in Germany confirmed the message of the PMI surveys, i.e. an economy that has lost momentum in recent months compared with the start of the year. Details of contributions to GDP growth in 2Q2024 also confirmed the weakness of domestic demand, particularly investment, which fell sharply. Together with the contraction in consumption, this explains the 0.1% decline in GDP in 2Q2024. All in all, the German economy remains the weak link in Eurozone growth, affected in particular by a global industrial cycle that continues to stall.
J. Powell’s remarks at Jackson Hole last week reinforced the market’s view of Fed support. Indeed, in addition to confirming the conviction that we will have a first rate cut in September, expectations of rate cuts in the quarters ahead were reinforced. Expectations that the Fed would provide strong support for the economy in the near future have bolstered most asset classes. As a result, we note that financial conditions have eased remarkably in the US over the past period. They have been the most accommodating since the beginning of 2022, a factor which should ease fears of an abrupt slowdown in the US economy, but without of course eliminating this risk.
