Chair Powell - Unequivocally Dovish at Jackson Hole ! Front and Centre Focus on Employment Numbers | USD Index at lower end of the 100.50 - 106.50 Range

I have two basic rules about winning in trading as well as in life: 

1. If you don't bet, you can't win.

2. If you lose all your chips, you can't bet. 

~ Larry Hite

Over the last 3 weeks, after the Aug 5 lows, yields on US2s have consolidated in the 3.90% - 4.10% price range and US10s have progressively made lower lows to close the week at 3.92% and 3.80% respectively. US2s10s bull steepened to close the week at -11.90 bps. USD index closed the week at 100.68, 5% off highs of 106.13 June highs and within close proximity to the established range of 100.50 - 106.50 since last year. 

There is a 76% probability of a 25 bps rate cut in the Sep Policy. The market is broadly equally divided between a 25 bps and a 50 bps in the November Policy and holds a 87% probability of FFR in the 4.25% - 4.50% range by end of 2024. By next year September Policy, the market assigns a 90% probability of FFR at 3.25% - 3.50%, i.e. 200 bps of cuts in next 1 year. 

The Atlanta Fed GDP Now estimates updated as on Aug 16 are for Q3 GDP at 2.0%. 

We spoke about the benchmark revisions to the Establishment Survey Data in my blog post on Aug 16, 2024. The BLS Surveys 119000 companies where every once in a while they benchmark the survey to State Level Unemployment Claims. BLS released the benchmark revision to the Establishment Survey Data. The preliminary estimate of the benchmark revision indicates an adjustment to March 2024 total nonfarm employment of -818,000 (-0.5%), a huge adjustment the likes of which have not been seen since GFC. 

The NFP data released earlier showed total 2.90 mn jobs created for the period Apr 23 - Mar 24 or 242K Jobs per month. Post the revisions, total Jobs created number slowed to 2.082 mn or 173500 per month.  Market participants think that the downward adjustment has been because of the net birth death model adjustments which accounts for the net effect of business opening and going out of business. Market participants are also discussing the possibility that this revision might be overstated because the QCEW data does not account for many unauthorized immigrants who are not part of the unemployment insurance system but were accurately included in the initial payroll figures. Additionally, the QCEW has historically been subject to upward revisions in recent years.

Remarks by Jerome Powell at Jackson Hole were unequivocally dovish with focus shifting to Employment from Inflation.  Nick Timiraos writes " The Fed Pivot is complete". The Key highlights from the speech are:

1. The balance of risks to our two mandates has changed 

2. Confidence has grown that inflation is on a sustainable path back to 2%

3. The rise in Unemployment has not been the result of elevated layoffs , rather the increase mainly reflects a substantial increase in the supply of workers and a slowdown from the previously frantic pace of hiring. The labor market conditions are less tight than just before the pandemic and it seems unlikely that the labor market will be a source of elevated inflationary pressures any time soon. We do not seek or welcome further cooling of the labor market conditions. The downside risks to employment have increased. The time has come for policy to adjust. The Direction of travel is clear and the timing and pace of rate cuts will depend on incoming data, the evolving outlook and the balance of risks. We will do everything we can to support a strong labor market as we make further progress towards price stability. 

On the data front, Initial Jobless Claims do not offer any fresh catalyst and the Home Sales Data showed sequential improvement. 

In August, the US PMI Composite Output Index slightly declined to 54.1 (from 54.3 in July), reflecting slower overall growth. The Manufacturing PMI fell to 48.0 (from 49.6), marking an eight-month low and indicating contraction in the manufacturing sector. Meanwhile, the Manufacturing Output Index dropped sharply to 47.8 (from 50.5), a 14-month low, signaling a significant decline in manufacturing production. In contrast, the Services Business Activity Index rose to 55.2 (from 55.0), showing continued robust growth in the services sector. Employment saw a decline, especially in manufacturing, where hiring nearly stalled. Inflation eased, with the slowest rise in prices since June 2020, though input costs remained high. The release states “This ‘soft-landing’ scenario looks less convincing, however, when you scratch beneath the surface of the headline numbers. Growth has become increasingly dependent on the service sector as manufacturing, which often leads the economic cycle, has fallen into decline. The manufacturing sector’s forward-looking orders-to inventory ratio has fallen to one of the lowest levels since the global financial crisis."

On the USD Index, when we look at the chart below, we see USD index finding support at 100.60 - 100.80 three times in past 2 years (Jan 23 , Apr 23, Dec 23 and most recently on Friday) and a shakeout once in July 23 and the levels reclaimed. We had a break out from a symmetrical triangle but do I like chasing the USD lower when 200 bps of rate cuts has already been priced in and the data while softening is still holding up. No, absolutely not. 

I prefer being neutral here and look for opportunities to initiate fresh shorts on the USD on a retracement to the 38.20% handle of the down move from 106.08 to 100.50 lows at 102.65. 

Over the next week, we have the Durable Goods Orders data, Home Price Indices, IJC and CJC, Q2 GDP, the PCE data (estimates are for 0.17% mom on Headline and 0.13% mom on Core PCE prices) and Pending Home Sales Data. 

With Employment now being front and Centre of Fed's Focus, USD index could consolidate around the current levels and I think a sustained breakout from the 100.50 - 106.50 range could come on material deterioration in US employment data which comes only in the first week of September.

Be nimble and cautious trading around the current levels and most importantly be prepared at whatever market throws at you. Have a good week ahead !!