As we wait for Powell to make his last and highly anticipated Jackson Hole speech as Fed Chair, let’s take a quick look at what markets are pricing in for interest rates towards the end of the year.
After yesterday’s better-than-expected Flash PMI data, as well as the hawkish Fed talk, money markets trimmed their bets for cuts a little but by roughly 5 basis points by year-end.
Currently, pricing for the September meeting is at -18 basis points, meaning a roughly 75% chance of a cut at the September meeting.
For year-end, we are currently at -49 basis points, meaning markets are just shy of fully pricing in two cuts for this year.
If Powell pushes back against assumptions of a September cut, we could see bets for September drop a bit, but as they will be waiting for the data in early September I doubt whether markets will completely price out a cut. We probably end up closer to 50/50 if Powell says the recent jobs wasn’t enough and they need more information.
However, if he completely changes his tune, and talks up cuts due to the labour market, then we could see markets taking the current -49 basis points closer to 60, meaning pricing in a small premium of 3 cuts this year.
Below is just a general idea of how major asset classes are roughly expected to react in either scenario:
Hawkish Powell pushing back against September cut assumptions: USD▲, Yields▲, Equities▼, Gold▼
Dovish Powell confirming a September cut and concerned about labour: USD▼, Yields▼, Equities▲, Gold▲
