Week Ahead: NFP to determine the size of the Fed rate cut

It’s a new month, a return from the holiday period and the first Friday of September. That means the usual monthly US employment report which will garner even more attention than usual. As Fed Chair Powell said at his recent speech at Jackson Hole, the “time has come for policy to adjust” and that the timing of rate cuts “will depend on incoming data”. He also placed extra emphasis on the labour market, saying that policymakers would “not seek or welcome further cooling in labour market conditions.”

This all points to the headline and unemployment prints being crucial for the size of the incoming September rate reduction. Bets are currently 70/30 on a 25 or 50 bps move. Another weak report will hit the dollar and may hurt stock markets which have enjoyed an impressive few weeks of strength. Fresh record highs could prove tricky if the data rekindles recession fears. But weather-related issues around the July numbers might see a bounce back in the labour market, boosting the soft landing theme.  

The Bank of Canada meeting will bring another quarter-point rate cut, with money markets pricing in two more similar moves in October and December. This straight-line trajectory of what would be five consecutive rate cuts into year-end, plus a similar path in 2025 implies near perfection in the delivery of aggressive rate cuts. Is that too perfect? USD/CAD has found support just below 1.35 as the loonie has appreciated due to broader FX moves and the soft August for the dollar. This move could put a squeeze on the big build up of CAD short positioning that developed through the middle of the year, just as CAD troughed.

In Brief: major data releases of the week

Tuesday, 3 September 2024

– US ISM Manufacturing: Consensus sees the August print at 48.1, an improvement from the prior eight-month low at 46.8. A reading below 50 indicates contraction in the sector, which accounts for just over 10% of the economy.

Wednesday, 4 September 2024

– Australia GDP: Q2 GDP is forecast to print at 0.2%, which would mean the weakest annual growth momentum since the early 1990s recession. Domestic demand remains weak, but the RBA is more concerned about inflation.

– Bank of Canada Meeting: Markets expect a third straight 25bps cut, taking the overnight rate to 4.25%. There will be no forecast updates. Slowing growth and a cooling job market are pushing inflation back down closer to target.

Thursday, 5 September 2024

– US ISM Services: Expectations are for an unchanged August reading at 51.4. Activity rebounded from a sub-50 four-year low print in July. Consumers remain relatively resilient which suggests robust third quarter GDP growth. 

Friday, 6 September 2024

– US Non-Farm Payrolls: The headline is expected to print at 165k, up from the prior 114k. The three-month average is now 170k. The jobless rate is likely to tick one-tenth lower to 4.2% and average hourly earnings remain at 0.3%.

– Canada Jobs: The headline reading is forecast to come in at 25,600, better than the prior net loss of 2,800 jobs. Gains in full-time work were offset by part-time job losses. The unemployment rate is seen one-tenth higher at 6.5%.