At present, the Federal Reserve has maintained the target range of the federal funds rate at a high level of 5.25% -5.50% for over a year. And with Federal Reserve Chairman Powell announcing at the Jackson Hole Global Central Bank Annual Meeting last month that "the time for policy adjustment has come," it indicates that the Fed is almost certain to start cutting interest rates from the September 17-18 meeting.
As for the magnitude of the interest rate cut - whether it is 25 basis points or 50 basis points - it will undoubtedly depend on the performance of the US economic data in the next two weeks.
The following chart shows the important US data and financial events before the release of the Federal Reserve's interest rate decision on September 18th, as listed by industry insiders (the impact of the data is indicated by the size of circles).
It is not difficult to see that as September approaches, apart from the US August retail sales data to be released during the interest rate meeting (which is difficult to quickly consider), there are actually only three sets of key macroeconomic indicators in the United States that have significant impact left, namely:
The July JOLTs job vacancies in the United States will be released this Wednesday; The US non farm payroll data for August, which will be released this Friday; And the US August CPI data to be released next Wednesday.
First Test: July JOLTS Job Vacancies in the United States
The US June job vacancy level announced at the end of July was significantly higher than the market expectation of 8 million, while the number of job vacancies per unemployed person slightly decreased to 1.2, roughly equivalent to the level in previous years before the pandemic, indicating that the US job market continues to maintain resilience.
Federal Reserve Chairman Powell has been closely monitoring the Job Openings and Labor Mobility Survey (JOLTS) of the US Department of Labor to understand the imbalance between labor supply and demand. During the epidemic, each job seeker was once assigned two job vacancies.
At present, this situation has significantly cooled down. Other aspects of the investigation have gradually returned to pre pandemic levels, such as the voluntary resignation rate now dropping to 2.1%, and Federal Reserve officials believe that the overall supply and demand in the labor market are returning to balance. Although the pace of recruitment has slowed down, the rate of layoffs remains stable, indicating that the company is still retaining employees.
The July JOLTS job vacancy numbers released this Wednesday may become the most closely watched labor market indicator before the release of non farm payroll data.
The most important test: US non farm payroll data for August
The non farm payroll in the United States increased by 114000 jobs in July, the lowest record since December 2020, significantly lower than expected, and the revised data for the first two months was 29000 fewer than previously reported. More importantly, the unemployment rate also rose to 4.3% that month, triggering the Sam's Rule, which greatly intensified concerns about the deteriorating US job market and the possibility of plunging the economy into recession.
It can be said that the non farm payroll data at the beginning of last month was almost the direct driving force behind the continuous occurrence of "Black Friday" and "Black Monday" in the global market. This also makes Friday's August non farm payroll report unquestionably the most critical economic indicator before the Federal Reserve's September decision.
Phil Camporeale, portfolio manager of global allocation strategy at JPMorgan Asset Management, believes that Friday's non farm payroll report may become the final "arbiter" for the Federal Reserve at its September policy meeting on whether to lower the benchmark interest rate by 25 basis points or 50 basis points.
Citigroup also emphasized that as the non farm payroll data for August will be released one day before the quiet period of the Federal Reserve's September FOMC meeting (starting this weekend), this data will largely determine whether to cut interest rates by 50 basis points or 25 basis points in September. Citigroup still gave a more pessimistic forecast for Friday's non farm payroll - the bank expects only 125000 jobs to be added in August (the median market expectation is 165000), and the unemployment rate to remain at 4.3%.
Victoria Fernandez, Chief Market Strategist at Crossmark Global Investments, stated in an interview that from a market perspective, the US employment report scheduled for release this Friday will be very important. This report on employment growth and unemployment rate in August may affect the trend of stocks and bonds.
The final test: US August CPI data
Last Friday, the personal consumption expenditure price index (PCE), which is the most important inflation indicator for the Federal Reserve, increased by 2.5% year-on-year in July, in line with economists' expectations. Excluding volatile food and energy prices, the core PCE also met expectations, with a year-on-year growth of 2.6% - both the overall and core PCE did not accelerate in July compared to the previous month. In terms of month on month growth, both the overall and core PCE price indices increased by 0.2% in July.
It can be said that the lower month on month inflation rate since April has supported the growing confidence of Federal Reserve officials that inflation is returning to the Fed's target in a sustainable way, allowing them to shift the focus of monetary policy towards protecting the job market.
Tani Fukui, an economist at MetLife Investment Management, said, "To some extent, this is the best possible increase for PCE. There was no unexpected rise in service sector inflation in this inflation report, which is a scenario that the Federal Reserve is more concerned about, but this inflation report did not raise any concerns
In fact, since the second half of this year, the importance of US employment data or its impact on the market has gradually surpassed inflation indicators (this can also be seen from the comparison of the size of the data impact circle in the first graph of this article).
At present, the media expectation survey for August CPI has not been fully released, but the Cleveland Fed's inflation proximity model predicts that the year-on-year increase in US August CPI is expected to fall significantly to 2.56% (previously 2.9%). If this model is accurate, it will undoubtedly further lock people's expectations for the interest rate cut in September. Of course, as for the exact amount of interest rate cuts, the current employment data may have more say than inflation data.