What clues will Jackson Hole provide about the timing of US rate cuts?

Stay informed with free updates

Simply sign up to the Global Economy myFT Digest — delivered directly to your inbox.

Investors will be closely watching the Kansas City Federal Reserve’s Economic Policy Symposium at Jackson Hole on August 22-24 for clues about the timing of US rate cuts, following a rollercoaster of recent economic data.

A much weaker-than-expected US payrolls report in early August sparked fears of a recession, which drove investors to crank up their bets on imminent rate cuts, and triggered a plunge in global markets.

But subsequent data, including softer inflation figures and a strong retail sales report, have damped down predictions of a jumbo 0.5 percentage point cut in September and soothed investors’ concerns about the health of the economy.

“The Fed, we think, is likely to signal at Jackson Hole that a cut is likely at the next meeting, assuming that inflation progress holds,” said Mark Cabana, head of US rates strategy at Bank of America.

But he added that the size of the cut, as well as the pace of future cuts, will depend on economic data.

“So we don’t think that the Fed will close the door on the possibility of doing larger cuts if it seems necessary — but it likely won’t do much to signal that that’s going to happen,” he said.

The next Fed interest rate decision is due on September 18. Markets are currently pricing in between three and four quarter point cuts this year from the current range of 5.25 to 5.5 per cent, the highest level in 23 years. Harriet Clarfelt

When will China cut interest rates again?

Few economists expect the People’s Bank of China to cut benchmark lending rates on Tuesday, even as authorities grapple with slower growth and lower consumer confidence in the world’s largest economy.

The People’s Bank of China last month surprised markets with cuts to interest rates after the Third Plenum — the Communist party’s flagship policy meeting — in order to meet the country’s 5 per cent annual growth target. Central bank governor Pan Gongsheng has signalled a structural shift towards the short-term seven-day reverse repo rate, the rate at which other financial institutions get to deposit money at the central bank, as the new anchor for interest rates.

Ju Wang, head of greater China FX and rates strategy at BNP Paribas, is among those not expecting a cut. “We think [the loan prime rate, the benchmark for corporate and household loans] will move alongside the next rate cut, which is likely to happen in Q4, in our view,” she said.

“We expect the PBoC to stick to small and gradual pace of interest rate cuts” and cut the reverse repo rate by 0.25 percentage points in the second half of the year, she added.

Wang said that authorities would also be mindful of currency stability. She cited the impact of a Bank of Japan rate rise last month, which sent the yen soaring against the dollar and forced traders who had been borrowing in yen in order to buy higher-yielding assets to unwind those bets.

The PBoC decision comes as Chinese policymakers engage in a campaign to create a floor for long-dated bond yields, which move inversely to prices. This is ostensibly to avoid a bond market bubble and a Silicon Valley Bank-style crisis among local banks, as well as to avoid the deflationary signal that a long-dated bond rally implies. Authorities last week named and shamed some buyers of government debt. 

“It is going to be rare if they cut [rates] back to back,” said Helen Qiao, chief economist for Greater China at Bank of America. She expects two further cuts this year of a total of 0.20 percentage points to the loan prime rate. Arjun Neil Alim

Is Eurozone business activity contracting?

Investors worried about the health of the Eurozone economy will be looking for clues in business activity survey data next week. 

Most economists expect the S&P Global purchasing managers’ index to stay above the all-important 50 level, which would indicate growth from the previous month.

Last month’s reading saw the figure drop below expectations to a five-month low of 50.1. The reading is expected to stay at this level this month, according to a Bloomberg poll of economists, although economists polled by Reuters expect it to tick up to 50.3. Divergence between manufacturing and the larger services sector is expected to persist.

Since the last reading, pressure has mounted on the European Central Bank to cut interest rates in September, after the ZEW Indicator of Economic Sentiment showed collapsing investor expectations in the bloc’s economy.

Tomasz Wieladek, European economist at T Rowe Price, said recent financial market turmoil was likely to have affected survey results. He expects that the composite PMI will once again come in below expectations, and this time dip below 50.

But he added: “My view is that this weakness is going to be temporary. As long as sentiment continues to improve as it has, then the sentiment effect will probably unwind and PMIs will improve.”

In terms of what the ECB will be looking for, “they’ll put more weight on services,” said Wieladek. “They need these prices to come down. That will give them more confidence that there is disinflation in the services sector, and make it easier for them to cut in September.” Emily Herbert