Recession Fears vs. Rate Cut
Friday, September 13, Week 37
Welcome to this comprehensive macroeconomic report on the US and the USD. As a Forex trader, staying informed about the economic and financial landscape of the US is crucial for making informed trading decisions. This report provides a detailed analysis of the key factors influencing the US dollar, including geopolitics, fiscal policy, economic fundamentals, and monetary policy. We will delve into the prevailing market themes, examine the geopolitical landscape, analyse fiscal and monetary policy developments, and assess the overall macroeconomic outlook for the US and the USD. We will also highlight key economic indicators to watch in the upcoming month, providing you with valuable insights to navigate the Forex market effectively.
Market Themes: Navigating a Landscape of Uncertainty and Shifting Policies
1. Recession Fears Amidst Economic Slowdown
The US economy is exhibiting signs of a slowdown, raising concerns about a potential recession. This narrative is fuelled by a series of weaker-than-expected economic data releases, particularly in the manufacturing sector. While consumer spending has remained relatively resilient, the overall economic outlook is clouded by uncertainty.
September 6: The August jobs report revealed weaker-than-expected job growth, adding only 142,000 jobs compared to market expectations of 160,000. This fueled concerns about a potential slowdown in the US economy. However, the unemployment rate unexpectedly dropped from 4.3% to 4.2%, indicating a more resilient labour market than anticipated.
September 4: The ISM Manufacturing PMI for August showed a fifth consecutive month of contraction in factory activity, falling to 47.9 from 49.6 in July and below market forecasts of 49. This reinforced concerns about the health of the US economy and its resilience to higher borrowing costs.
September 4: The JOLTS report revealed a significant drop in job openings, falling by 237,000 to 7.673 million in July, the lowest level since January 2021 and well below market expectations of 8.10 million. This further fueled market concerns about a softening labour market.
September 2: US stock markets experienced a severe sell-off as fears of a US recession intensified, triggered by weak economic data and disappointing earnings from leading tech companies. The S&P 500 dropped 3%, the Dow Jones plummeted by 1,033 points, and the Nasdaq fell 3.4%.
September 2: The ISM Manufacturing PMI pointed to a surprise contraction in the manufacturing sector, adding to concerns about the US economy.
The upcoming month will be crucial for assessing the trajectory of the US economy and the validity of recession fears. Key economic indicators, such as the September retail sales data, industrial production figures, and the Philadelphia Fed Manufacturing Index, will provide further insights into the strength of consumer spending, the health of the manufacturing sector, and the overall economic momentum.
2. Fed Rate Cut Expectations Amidst Mixed Inflation Signals
The market is widely anticipating a Federal Reserve rate cut in the upcoming FOMC meeting on September 17th-18th. However, mixed inflation signals are creating uncertainty about the magnitude of the cut. While headline inflation has been moderating, core inflation remains elevated, suggesting that the Fed's task of bringing inflation down to its 2% target is far from complete.
September 11: The August CPI report revealed a 0.2% month-over-month increase in headline CPI, matching July's figure and meeting market expectations. However, the core CPI, excluding volatile food and energy prices, rose by 0.3%, exceeding forecasts of a 0.2% increase and accelerating from the 0.2% rise in July. This uptick in core inflation signalled persistent inflationary pressures, tempering hopes for a more aggressive 50 basis point rate cut by the Fed.
September 12: The August PPI report showed a 0.2% month-over-month increase in wholesale prices, exceeding forecasts of a 0.1% rise. The core PPI, excluding food and energy, also topped forecasts, rising 0.3%. However, the annual rates for both headline and core PPI surprised on the downside, with headline PPI rising 1.7%, below forecasts of 1.8%, and the core rate remaining steady at 2.4%.
August 23: Fed Chair Jerome Powell's speech at the Jackson Hole Economic Symposium reinforced market expectations that the Federal Reserve will deliver multiple rate cuts this year. Powell signalled that the Fed is prepared to lower interest rates in the near future, although he did not specify the timing or magnitude of the cuts.
July 31, Week 31: The Federal Open Market Committee (FOMC) decided to maintain the target range for the federal funds rate at 5¼ to 5½ percent. However, the minutes from the meeting indicated that a rate cut in September was increasingly likely, with most Fed officials expressing support for easing monetary policy if upcoming data met expectations.
The upcoming month will be crucial for assessing the trajectory of US monetary policy. The FOMC meeting on September 17th-18th will be a pivotal event, with market expectations currently centred around a 25 basis point rate cut. The release of key economic indicators, such as the August retail sales data, industrial production figures, and the Philadelphia Fed Manufacturing Index, will provide further insights into the strength of consumer spending, the health of the manufacturing sector, and the overall economic momentum, potentially influencing the Fed's decision.
3. Safe-Haven Demand Amidst Geopolitical Uncertainty
The US dollar has experienced periods of strength in recent months, driven by safe-haven demand amidst heightened geopolitical uncertainty. The ongoing conflict in the Middle East and the US-China trade war have contributed to risk aversion and a flight to safety, supporting the USD.
September 10: The Japanese yen depreciated past 143.000 per dollar, paring gains from the previous week as the US dollar rebounded ahead of the key US inflation data. Traders also scaled back their bets on a larger Fed rate cut this month following a mixed August jobs report, suggesting a more cautious approach to monetary policy easing.
September 6: The US dollar weakened against major currencies, with the dollar index depreciating to 100.900, approaching thirteen-month lows touched in August. This weakness was attributed to the increased expectations of a larger Fed rate cut, which would make the US dollar less attractive to yield-seeking investors.
September 2: The dollar index fell to as low as 102.100, hitting its lowest level since mid-January, as the weak economic data increased bets that the Fed will need to cut interest rates more aggressively.
August 12: The dollar index steadied around 103.100 as investors awaited key inflation data this week for confirmation that price growth has continued to stabilise. The dollar's stabilisation follows a tumultuous week that saw it tumble to a seven-month low due to US recession fears and the unwinding of yen carry trades.
The geopolitical landscape remains uncertain, with the potential for further escalation in the Middle East and continued tensions between the US and China. These geopolitical risks could continue to drive safe-haven demand for the USD in the upcoming month and beyond. The market will be closely watching for any developments in these areas, as well as the outcome of the US presidential election, which could significantly impact investor sentiment and the USD's performance.
The Geopolitical Landscape: Navigating a World of Conflict and Uncertainty
The past six months have been marked by heightened geopolitical tensions and uncertainty, creating a challenging environment for the US and the USD. The ongoing conflict in the Middle East, the US-China trade war, and the upcoming US presidential election have all contributed to a heightened sense of risk aversion among investors.
The recent escalation of the conflict in the Middle East, with the outbreak of hostilities between Israel and Hezbollah, has further added to market volatility and fuelled safe-haven demand for the USD. The conflict has raised concerns about the stability of the region and the potential for wider disruptions to global energy markets.
The US-China trade war, which has been simmering for several years, has also continued to weigh on market sentiment. The two economic superpowers have imposed tariffs on billions of dollars worth of each other's goods, disrupting global supply chains and raising concerns about the outlook for global economic growth.
The upcoming US presidential election in November is another major source of uncertainty. The outcome of the election could have significant implications for US economic and foreign policy, and the market is likely to remain volatile in the lead-up to the vote.
Geopolitical Influences on Market Themes
The conflict in the Middle East is exacerbating recession fears by raising concerns about global energy supplies and the potential for wider economic disruptions. The US-China trade war is also contributing to the slowdown in global economic growth, further fuelling recession fears. The uncertainty surrounding the US presidential election is adding to market volatility and making it more difficult for investors to assess the long-term outlook for the US economy and the USD.
The upcoming month will likely see continued volatility in financial markets as investors grapple with these geopolitical uncertainties. The outcome of the US presidential election, the trajectory of the conflict in the Middle East, and the progress of US-China trade negotiations will be key factors to watch.
"The world is a dangerous place to live; not because of the people who are evil, but because of the people who don't do anything about it." - Albert Einstein
The geopolitical landscape is a complex and ever-changing environment that can have a significant impact on financial markets. The current geopolitical situation is characterised by a high degree of uncertainty, with multiple risks and challenges facing the US and the USD. The outcome of the US presidential election, the trajectory of the conflict in the Middle East, and the progress of US-China trade negotiations will be key factors to watch in the upcoming months.
Fiscal Policy: A Shift Towards Responsibility Amidst Long-Term Challenges
The US fiscal policy landscape has been dominated by the Biden administration's ambitious spending plans and efforts to address the widening budget deficit. The American Rescue Plan, the Bipartisan Infrastructure Law, and the Inflation Reduction Act have all contributed to increased government spending, while tax reforms aimed at ensuring the wealthiest Americans and corporations pay their fair share have sought to offset some of these costs.
However, the past month has seen a notable shift towards fiscal responsibility with the enactment of the Fiscal Responsibility Act of 2023. This legislation aims to reduce the deficit by roughly $1 trillion over the next decade through a combination of spending cuts and revenue increases.
Fiscal Influences on Market Themes
The shift towards fiscal responsibility is likely to have a mixed impact on the market themes outlined above. On the one hand, the reduction in government spending could contribute to a slowdown in economic growth, potentially exacerbating recession fears. On the other hand, the reduction in the deficit could help to stabilise the US dollar and reduce inflationary pressures.
The upcoming month will likely see continued focus on the implementation of the Fiscal Responsibility Act of 2023 and its impact on the deficit. The market will also be watching for any signs of progress in addressing the long-term challenges facing US fiscal policy, such as the rising cost of healthcare and Social Security.
The US fiscal policy landscape is currently in a state of transition, with the Biden administration seeking to balance its ambitious spending plans with the need for fiscal responsibility. The enactment of the Fiscal Responsibility Act of 2023 is a significant step in this direction, but the long-term sustainability of US public finances remains a concern.
Economic Fundamentals: A Mixed Picture of Slowdown and Moderating Inflation
The US economy has shown mixed performance in recent months, with signs of a slowdown emerging alongside continued moderation in inflation.
Economic Influences on Market Themes
The mixed economic data is contributing to the uncertainty surrounding the outlook for the US economy and the USD. The slowdown in manufacturing activity is fuelling recession fears, while the moderation in inflation is supporting expectations for a Fed rate cut. The strength of consumer spending is providing some support to the economy, but it remains to be seen whether this can offset the weakness in other sectors.
The US economy is currently at a crossroads, with signs of a slowdown emerging alongside continued moderation in inflation. The strength of consumer spending is providing some support to the economy, but it remains to be seen whether this can offset the weakness in other sectors. The upcoming month will be crucial for assessing the trajectory of the US economy.
Monetary Policy: A Data-Dependent Approach Amidst Rate Cut Expectations
The Federal Reserve has adopted a data-dependent approach to monetary policy, signalling its willingness to adjust interest rates based on the evolving economic outlook. The market is widely anticipating a rate cut in the upcoming FOMC meeting on September 17th-18th, but the magnitude of the cut remains uncertain.
The Fed's decision will be influenced by a number of factors, including the strength of the US economy, the trajectory of inflation, and the outlook for global economic growth. The recent slowdown in manufacturing activity and the mixed inflation signals are likely to be key considerations for the Fed.
Monetary Influences on Market Themes
The Fed's monetary policy decisions are directly impacting the market themes outlined above. The expectation of a rate cut is supporting the stock market and putting downward pressure on the USD. However, the uncertainty surrounding the magnitude of the cut is contributing to market volatility.
The upcoming month will be crucial for assessing the trajectory of US monetary policy. The FOMC meeting on September 17th-18th will be a pivotal event, with market expectations currently centred around a 25 basis point rate cut. The release of key economic indicators, such as the August retail sales data, industrial production figures, and the Philadelphia Fed Manufacturing Index, will provide further insights into the strength of consumer spending, the health of the manufacturing sector, and the overall economic momentum, potentially influencing the Fed's decision.
"Monetary policy is a blunt instrument. It can't be used to fine-tune the economy." - Ben Bernanke
The Federal Reserve is currently in a delicate balancing act, seeking to support the US economy while also keeping inflation under control. The market is widely anticipating a rate cut in the upcoming FOMC meeting, but the magnitude of the cut remains uncertain. The Fed's decision will be influenced by a number of factors, including the strength of the US economy, the trajectory of inflation, and the outlook for global economic growth.
Macroeconomic Outlook: A Delicate Balancing Act for the US Dollar
The US economy is at a crossroads, with signs of a slowdown emerging alongside continued moderation in inflation. The Federal Reserve is widely expected to cut interest rates at its September meeting, but the exact timing and magnitude of the cuts remain uncertain. The market will be closely watching the upcoming economic data releases, particularly the August CPI report and the August PPI report, for further clues on the Fed's policy outlook.
The outlook for the US dollar remains uncertain. Its trajectory will likely depend on the Fed's monetary policy decisions, the performance of the US economy, and geopolitical developments. The market currently expects a rate cut in September, with some analysts predicting a 50-basis point cut. However, the resilience of the US economy in the second quarter and the Fed's data-dependent approach to monetary policy suggest that the USD could stabilise or even strengthen in the near term.
Key Economic Indicators to Watch: Gauging the Path Ahead
Core Inflation Rate MoM (United States) AUG: The August Core Inflation Rate report was released on Wednesday, September 11th, Week 37. The actual result came in at 0.3%, exceeding market expectations of a 0.2% increase. This suggests that core inflation is remaining elevated, potentially reducing the likelihood of a 50 basis point rate cut by the Fed. This is a lagging indicator.
Inflation Rate MoM (United States) AUG: The August Inflation Rate report was also released on Wednesday, September 11th, Week 37. The actual result came in at 0.2%, matching market expectations. This suggests that inflation is moderating, potentially supporting the case for a Fed rate cut. This is a lagging indicator.
PPI MoM (United States) AUG: The August PPI report was released on Thursday, September 12th, Week 37. The actual result came in at 0.2%, exceeding forecasts of a 0.1% rise. This suggests that producer price inflation is moderating, potentially supporting the case for a Fed rate cut. This is a leading indicator.
Core PPI MoM (United States) AUG: The August Core PPI report was also released on Thursday, September 12th, Week 37. The actual result came in at 0.3%, exceeding forecasts of a 0.2% increase. This suggests that core producer price inflation is not moderating as much as expected, potentially reducing the likelihood of a 50 basis point rate cut by the Fed. This is a leading indicator.
Initial Jobless Claims (United States) SEP/07: The Initial Jobless Claims report for the week ending September 7th was released on Thursday, September 12th, Week 37. The actual result came in at 227,000, below market expectations of 230,000. This suggests that the labour market is continuing to tighten, potentially adding to inflationary pressures. This is a leading indicator.
Retail Sales MoM (United States) AUG: The August Retail Sales report is scheduled for release on Tuesday, September 17th, Week 37. The market expects a 0.20% month-on-month increase in retail sales. If the actual result is in line with this forecast, it would suggest that consumer spending is slowing, potentially raising concerns about the health of the US economy. This is a leading indicator.
Industrial Production MoM (United States) AUG: The August Industrial Production report is also scheduled for release on Tuesday, September 17th, Week 37. The market expects a 0.00% month-on-month change in industrial production. If the actual result is in line with this forecast, it would suggest that the manufacturing sector is stabilising, potentially supporting the view that the US economy is not heading towards a recession. This is a coincident indicator.
NAHB Housing Market Index (United States) SEP: The September NAHB Housing Market Index is scheduled for release on Tuesday, September 17th, Week 37. The market expects a reading of 40. If the actual result is in line with this forecast, it would suggest that builder confidence remains weak, potentially raising concerns about the outlook for the housing market. This is a leading indicator.
Building Permits Prel (United States) AUG: The August Building Permits report is scheduled for release on Wednesday, September 18th, Week 38. The market expects a seasonally adjusted annual rate of 1.41 million building permits. If the actual result is in line with this forecast, it would suggest that the housing market is stabilising, potentially supporting the view that the US economy is not heading towards a recession. This is a leading indicator.
Housing Starts (United States) AUG: The August Housing Starts report is also scheduled for release on Wednesday, September 18th, Week 38. The market expects a seasonally adjusted annual rate of 1.25 million housing starts. If the actual result is in line with this forecast, it would suggest that the housing market is stabilising, potentially supporting the view that the US economy is not heading towards a recession. This is a leading indicator.
FOMC Meeting: The Federal Open Market Committee (FOMC) will meet on Tuesday and Wednesday, September 17th-18th, Week 37. The market expects the Fed to cut interest rates by 25 basis points. If the Fed cuts rates as expected, it would be the first rate cut since March 2023 and could signal the start of a new easing cycle.
Current Account (United States) Q2: The Q2 Current Account report is scheduled for release on Thursday, September 19th, Week 38. The market expects a current account deficit of $-257 billion. If the actual result is in line with this forecast, it would suggest that the US current account deficit is widening, potentially putting downward pressure on the USD. This is a lagging indicator.
Philadelphia Fed Manufacturing Index (United States) SEP: The September Philadelphia Fed Manufacturing Index is scheduled for release on Thursday, September 19th, Week 38. The market expects a reading of 2.4. If the actual result is in line with this forecast, it would suggest that manufacturing activity in the Philadelphia region is slowing, potentially raising concerns about the health of the US economy. This is a leading indicator.
Existing Home Sales (United States) AUG: The August Existing Home Sales report is scheduled for release on Thursday, September 19th, Week 38. The market expects a seasonally adjusted annual rate of 3.85 million existing home sales. If the actual result is in line with this forecast, it would suggest that the housing market is slowing, potentially raising concerns about the health of the US economy. This is a leading indicator.
Chicago PMI (United States) SEP: The September Chicago PMI is scheduled for release on Monday, September 30th, Week 40. The market expects a reading of 45. If the actual result is in line with this forecast, it would suggest that economic activity in the Chicago region is contracting, potentially raising concerns about the health of the US economy. This is a leading indicator.
Dallas Fed Manufacturing Index (United States) SEP: The September Dallas Fed Manufacturing Index is scheduled for release on Monday, September 30th, Week 40. The market expects a reading of -9.7. If the actual result is in line with this forecast, it would suggest that manufacturing activity in the Texas region is contracting, potentially raising concerns about the health of the US economy. This is a leading indicator.
Conclusion
The US dollar is currently facing a confluence of economic and geopolitical challenges. The US economy is showing signs of a slowdown, while inflation remains elevated. The Federal Reserve is widely expected to cut interest rates at its September meeting, but the exact timing and magnitude of the cuts remain uncertain.
Sources
U.S. Bureau of Economic Analysis (BEA)
Federal Reserve
U.S. Census Bureau
Institute for Supply Management (ISM)
National Association of Home Builders (NAHB)
Standard & Poor's
Trading Economics
Financial Juice
Stratfor Worldview