FED: Powell: Asking Whether Policy Is In Right Place Going Into October Meeting
Fed Chair Powell doesn't deviate much from the September FOMC message in a Q&A appearance Tuesday. He repeats his comment from last week's press conference that he can no longer describe the labor market as "solid", while they'll be assessing "vast quantities" of data to make a decision at the October meeting:
- "So what we've done all year is, our policy rate has been tight because inflation has been above our target, but the labor market was very solid. Now over the last really four months, really over the summer, the labor market has softened. Payroll jobs have dropped a lot, so we can't really say that anymore. And I think what that told us, is that stance of really having a tight focus on inflation really needs to moderate toward a more balanced approach. And so that's why we took the action we took at our at our last meeting. And as we go to our next meeting, we'll be asking ourselves, we'll be looking at the data very carefully - labor market data, growth data, inflation data, all the vast quantities of data that we get and asking ourselves, is policy in the right place, and if not, we move it there."
- He says "I would say we do see meaningful weakness in the labor market now, very low job creation."
- Powell says the latest Beige Book showed a fairly consistent economic picture across Fed regions: "All around the country... you saw a pretty modest growth, wage and price inflation at modest to moderate levels. The economy growing, but not fast, and significant uncertainty ... federal public policy is kind of weighing on investments and decisions about investment and hiring, except in the area of the AI buildout which is just going really strong pretty much many parts of the country."
- He repeats what he said last week about how it doesn't appear that overseas exporters are eating the cost of tariffs, but rather importers/retailers - "and they're not passing along to consumers that much of the cost. So the actual effects on inflation have been quite modest."
- "The question is, are companies, then are they going to eventually be able to pass that stuff through? And then that might drive inflation up a little higher?... I would say that that the passthrough to consumers has been later and less than we expected. How much of that will continue, I don't know, but the responsible thing, from our standpoint, was to watch and wait, because, you know, it's our job to make sure we don't make a mistake on inflation."
- On the balance of risks: "We may find out in a year that inflation actually wasn't under control, and it's back up to three and a half or 4%. No one thinks this is the base case, but that's the risk of cutting too early or too much... of course, the risk of cutting too late is that the labor market weakens unnecessarily. There's no risk free path, and you know, it's just, it's a very difficult policy environment when your two goals are telling you two different things, you've got to make a compromise."
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FED: NatWest Now Sees Cuts In 2025, Starting In September
As with Deutsche earlier, NatWest has changed its Fed call after the Powell Jackson Hole speech to reflect a 25bp September cut. Previously, the call was for no cuts in 2025. The new baseline outlook includes further 25bp cuts in December and March, bringing rates closer to neutral ("however, the changing composition of the committee becomes far less clear once Powell term expires in May").
- "While the August jobs and CPI reports will be watched carefully, it is clear to us that Powell has already seen enough to decide renewed action to counter downside economic risks is likely warranted, and so we now look for a 25 basis point rate cut on September 17th.
- "We expect officials will very much downplay the likelihood of a 50bp rate cut leading up to the jobs data, but we have to admit if the report is "weak enough" (e.g., the unemployment rate increases by 0.3pct to 4.5% (where officials had it at year end) anything can happen and wouldn't rule anything out. However, given the latest pivot and with financial markets pricing (86% of a 25bp rate cut) a lot has to happen (unemployment rate 3-handle and core CPI +0.5%) for the FOMC to undeliver and hold off from a rate cut in September. "
USDCAD TECHS: Bull Cycle Hindered
- RES 4: 1.4111 High Apr 10
- RES 3: 1.4019 38.2% retracement of the Feb 3 - Jun 16 bear leg
- RES 2: 1.3968 High May 20
- RES 1: 1.3925 High Aug 22
- PRICE: 1.3840 @ 16:55 BST Aug 22
- SUP 1: 1.3794 20-day EMA
- SUP 2: 1.3769/22 50-day EMA / Low Aug 22
- SUP 3: 1.3576 Low Jul 23
- SUP 4: 1.3557/40 Low Jul 3 / Low Jun 16 and the bear trigger
Gains this week in USDCAD and the breach of resistance at 1.3879, the Aug 1 high, marked a positive development, however the slippage into the Friday close undermines this sentiment - for now. Moving average studies have crossed and are in a bull-mode position, reinforcing current conditions. An extension higher would signal scope for a climb towards 1.4019, a Fibonacci retracement. On the downside, support to watch lies at 1.3769, the 50-day EMA - a level not yet challenged by the correction lower.
CANADA: Q2 Expected To See GDP Contraction, BOC's Estimate Looks Too Negative
The June retail sales release helps wrap up the last major data before Canadian Q2 GDP is released on Friday August 29.
- Current Bloomberg analyst consensus shows Q2 is expected to show a 0.7% Q/Q annualized contraction, versus +2.2% in Q1. The private sector consensus is more optimistic than the Bank of Canada's -1.5% estimate in its July Monetary Policy Report (which MNI thinks is too low) but the component-by-component breakdown is similar if of differing magnitudes.
- Widely expected are: a softening in household consumption growth (+1.2% in Q1), with a pickup in government spending, continued weakness in fixed investment (-3.0% in Q1) though with residential outperforming business capital formation, and a reversal of Q2's positive contribution from net exports. In short, the data are expected to confirm that trade activity was brought forward to Q1 ahead of tariffs, with the effects reversing in Q2.
- Going forward, the BOC envisages growth resuming in Q3 (+1.0% in its "current tariff" scenario). In the meantime, a weak Q2 reading could provide Governing Council with more conviction to resume easing rates in September, with the July meeting decision noting "If a weakening economy puts further downward pressure on inflation and the upward price pressures from the trade disruptions are contained, there may be a need for a reduction in the policy interest rate".
