FOMC and NFP Critical for Fed's Policy

The major US economic events this week are expected to maintain the case for the Federal Reserve to proceed with its first interest rate cut in September.

Last Pause Before the Plunge

The Federal Reserve is expected to maintain its current policy stance at the conclusion of its two-day meeting tomorrow. The Fed is anticipated at this meeting to pave the way for a 0.25% interest rate cut in September. A small minority, just 4.1% for a July cut and 11.9% for 50 basis points of easing by September, hold a more dovish outlook.

However, the Fed could also adopt a "hawkish" position by simply reiterating the need for additional data prior to any action. In this scenario, the Fed would likely use the upcoming Jackson Hole Symposium in August to signal its intentions regarding the September meeting. This approach would mirror the Fed's communications at the start of its previous rate hiking cycle in 2022.

The markets seem hopeful the Fed will provide clearer guidance, either through its policy statement or the Chairman's remarks during the post-meeting press conference. Yet markets have again moved ahead of the Fed, currently pricing in three rate cuts this year versus the single decrease projected in the Fed's most recent economic projections. This year, markets have been consistently disappointed by the Fed's reluctance to ease monetary policy more aggressively, and that pattern could repeat after this week's decision.​

NFP to Make Case for Easing

The market's reaction to the latest jobs figures will likely depend on the Federal Reserve's commentary. Specifically, investors will focus on the Fed's rationale for waiting another two months before beginning monetary easing. To date, concerns around tight labour market conditions contributing to inflation pressures, particularly in the services sector, have been cited. However, this could be alleviated if the Fed downplays the importance of employment data in its decision-making.

Economists forecast that the July NFP figure will show 177K new jobs, below June's 206K, and consistent with expectations of slowing hiring as economic growth moderates. The unemployment rate is expected to remain unchanged at 4.1%, with a modest rise not expected to unduly concern the market, unlike the recent move below 4%. Average hourly earnings growth is also anticipated to hold steady at the previous 3.9% annual rate.

Having accepted the likelihood of interest rate cuts, the stock market risks further declines should incoming data diverge from this narrative. However, with many company earnings releases scheduled, any reaction may quickly give way to a focus on business performance.​

Dow Jones Breaks Triangle Pattern

Dow (Wall Street) has remained particularly firm as investors have shifted towards more defensive plays. After forming a symmetrical triangle pattern and breaking out above 39700 points, the DJIA did not quite reach the projected target level of 42400 points. Although it climbed to new record highs before pulling back temporarily, the drop swiftly reversed after failing to break below the key 40000 round support. As such, prices may rise beyond the previous peak of 41400 while buyers maintain the nearby support. However, if lost, support at 39140 points could allow further decline towards 38300.

Source: SpreadEx / Wall Street

Key Takeaways

The US economic calendar this week is expected to reinforce the case for the Federal Reserve's first interest rate cut in September. The Fed will likely keep policy unchanged at its meeting but pave the way for a 0.25% cut in September, though some see a cut as early as July. The Fed could also remain data-dependent and signal intentions at the upcoming Jackson Hole Symposium. Nonfarm payrolls on Friday will be crucial for guidance as the stock market risks further decline if data diverges from the rate cut narrative. However, earnings releases may redirect focus to business performance.