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10 Sept 2024 | 5 minutes to read
The US Federal Reserve (Fed) is almost certain to cut interest rates in September, but the question is now “by how much?” The July Federal Open Market Committee (FOMC) minutes confirmed that members were prepared to cut interest rates by 25bps in September, but has recent market volatility and economic data made the case for 50bps?
Last week’s economic data offered a mixed picture of the US economy. On the positive side, ISM survey data pointed to activity improving. Both the manufacturing and services components saw the index rise, suggesting that the services sector is in good health, while manufacturing remains challenged, but less so.
A soft July ISM Manufacturing print was one of the factors that startled markets at the start of August, alongside a soft payroll report, with investors fearing the FOMC was ignoring evidence of a rapidly slowing economy.
Employment data was more mixed. August data did show an improvement in both headline and private payrolls, with 142,000 employees added across the economy, but July data was revised down further to 89,000 from 114,000. The survey based measure of employment saw unemployment fall modestly to 4.2% from 4.3%, while wage growth accelerated modestly to 0.4% from 0.2%. The Job Openings and Labor Turnover Survey (JOLTS) for July signaled continued weakening, with the vacancies to unemployed workers ratio falling to 1.07, below the pre-pandemic level seen at the end of 2019.
All in all, this data paints a picture of an economy still in good shape, but with clear pressure on certain areas. Crucially for the Fed, inflation data continues to be in line with forecasts. This means that the Fed is less concerned around the inflation side of the dual mandate, with employment gaining greater attention.
Current market pricing continues to imply over 100bps of interest rate cuts by the end of the year, implying a double-sized (50bps) cut at one meeting. Market pricing indicates that rates will be cut by a further 100bps by next summer, which would take the Fed Funds close to the level the Fed considered to be the neutral rate. While some meaningful rate cutting is possible, this pricing looks demanding, given that the economy is cooling relatively gradually. This could be a source of volatility if markets reprice.
After weeks of deadlock, France has a new Prime Minister. French President Emmanuel Macron appointed Michel Barnier, a member of the centre-right party Les Républicains to the role last week, two months after the snap election threw French politics into chaos.
With no overall majority in parliament, Macron must govern alongside a parliament of uneasy coalitions. New elections cannot be called until next year and the new administration faces further challenges ahead.
The next session of the National Assembly is due to begin on 1 October, after which point MPs could call a vote of no confidence. Michel Barnier may ask the President to convene the Assembly earlier to present his government, make a general policy declaration, and give the opportunity to MPs to voice their discontent. The parties of the left are likely to call for a vote of no confidence but, without the support of the right, this is likely to fail. Nonetheless, this reliance on the right does lend power to Front National leader, Marine Le Pen.
Legislatively, the government will be preoccupied with budget preparations, with a fiscal plan to be shared with the European Commission by 20 September.
Ahead of the November’s US election, Donald Trump outlined his economic plans in a speech last week. Speaking at the New York Economic Club, he announced a range of policy measures, including a sovereign wealth fund, funded "through tariffs and other intelligent things".
He announced plans to reduce the corporate tax rate from 21% to 15% for companies that make their products in the US, an independent government efficiency panel to root out waste in the federal government headed by Elon Musk, and a ban on mortgages for migrants living illegally in California.
Other measures included a national emergency declaration to boost domestic energy supply, removing bureaucratic hurdles holding up new energy projects and plans to open up portions of federal land for large-scale housing construction, with zones that will be "ultra low-tax and ultra low-regulation.”
Of these measures, changes to the tax rate would likely be the most fiscally consequential, reducing revenue by around USD $200bn through to 2035.
While betting odds still place Kamala Harris ahead, Donald Trump has gained ground in recent weeks, narrowing the Democratic lead and making the race a close call at this stage.
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