Powell Signals No Retreat, No Surrender – Reuters

(Reuters) – A look ahead at U.S. and global markets by Amanda Cooper.

This year, one prominent theme in the markets has been the persistent speculation surrounding the Federal Reserve’s potential conclusion of its rate hike cycle, though such optimism has frequently been tempered.

The U.S. central bank is indeed nearing its goal of controlling inflation. The overall consumer price pressures are diminishing significantly, largely due to a downturn in food and energy prices. In July, headline inflation was reported at 3.2% year-on-year, a substantial drop from June’s 9.1%, and approaching the Fed’s 2% target.

However, there are a few notable challenges. The inflation rate indicated by the Fed’s preferred metric, the core personal consumption expenditures (PCE) index, stands at 4.1%, having peaked at 5.4% in February 2022.

While job growth has slowed compared to last year, the economy is still expected to add around 170,000 jobs in August, marking more than 25 million jobs created in non-farm payrolls since the low point of the COVID pandemic in April 2020.

Importantly, Fed Chair Jerome Powell has reiterated the “higher for longer” approach essential to his and other officials’ communications this year, despite contrary bets from market participants.

The dollar, which economist Mohammed El-Erian referred to earlier this year as “the cleanest dirty shirt” among global currencies, is on track for a 2% rise in August, marking its strongest monthly performance since May, primarily due to expectations of at least one more Fed rate hike before the end of 2023.

Yields on U.S. two-year Treasury notes, which react most sharply to changes in Fed policy expectations, saw their largest weekly increase in two months following Powell’s remarks at the annual Jackson Hole Economic Policy Symposium.

He indicated a cautious approach to rate increases, relying on incoming data, while making it clear about the end goal. “It is the Fed’s job to bring inflation down to our 2% goal, and we will do so,” he asserted.

Although some asset managers are optimistic that the Fed’s rate hike cycle is concluding, speculators are remaining cautious. Data from the Commodity Futures Trading Commission for the week ending August 22 revealed that non-commercial market participants had increased their bearish holdings of U.S. two-year Treasury note futures to the highest level since at least 1990, suggesting a belief that two-year cash yields will continue to rise.

Traders in the money markets expect that the Fed has one more rate hike planned for this year, which would raise its target rate to a range of 5.50%-5.75%, compared to the current range of 5.25%-5.50%.

Just three months prior, when rates were set between 5.125%-5.37%, markets were anticipating a year-end range of 5.00%-5.25%, indicating expectations of at least one rate cut this year.

This week, investors will receive significant data that may influence their views on the Fed’s next moves. A second estimate of U.S. gross domestic product is scheduled for release on Wednesday, followed by core PCE and August non-farm payroll data on Thursday and Friday, respectively.

Key developments expected to provide direction for U.S. markets later on Monday include:

– Dallas Fed August manufacturing business index
– Auctions for three- and six-month bills; as well as two- and five-year notes.