Economy

“[W]hether the Fed delivers a 50bp cut in September will come down to the August jobs report, out in early September,” Citi economists, led by chief economists Andrew Hollenhorst said in a recent note.The labor market’s added importance comes as the latest inflation reading suggest a September rate cut is “all but a sure thing”, Citi said, likely shifting inflation to the Fed’s rearview mirror and turning the central bank’s focus to the labor market.  “A third consecutive month of sub-2% annualized core CPI inflation makes a September rate cut all but a sure thing and should keep Fed officials focused on employment and growth,” the economists added. A 50 basis point rate cut could be sanctioned by Fed officials if the unemployment rate stays at 4.3% or moves higher, Citi estimates, and may even be possible if the unemployment rate drops just 0.1%.Citi’s call for a bigger cut a further deterioration in the labor market has merit. Fed Chairman Jerome Powell has repeated flagged the increased in focus on the labor market and said the central bank would act if there was unexpected weakening. “If the labor market were to weaken unexpectedly or inflation were to fall more quickly than anticipated, we are prepared to respond,” Powell said at Jul. 31-Aug.1 FOMC press conference. The fed chief acknowledged that the labor market has cooled and returned to pre-pandemic levels, but said it remained “strong,” but but not overheated. But those remarks were delivered before the July nonfarm payrolls showed a climb in the U.S. unemployment rate by 0.2% to 4.3%, sparking recession fears and causing many to hit the panic button on stocks. “The most concerning sign is the rise in the unemployment rate to 4.3% from a low of 3.4%,” Citi said, though the recent jobless claims data, which have been dropping over the last two weeks, raises “expectations that the soft jobs report in July may have been ‘transitory.'” The reassuring data has raised the odds to about 75% that the Federal Reserve will ease by just 25 basis points in September rather than 50 bps, with odds of the latter now at just 25% compared with 51% in the prior week. With weeks still to go until the August nonfarm payrolls report due Sept. 6, Powell’s comments at Jackson Hole next week “could also be important in assessing the likely Fed path,” the economists added.But the Fed Chairman Jerome Powell is expected to keep his monetary policy cards close to his chest as data that will sway policy including the August job report will still be horizon. “Since the policy action in September depends on data not yet released, Powell is unlikely to provide clear guidance toward a 25bp or 50bp cut,” they added,But there is a risk that Chair Powell may hint at loosening policy should he signal the need to “more quickly to achieve a neutral setting,” Citi said. More

(Reuters) -Global shares pushed higher on Friday, adding to weekly gains, after encouraging U.S. economic data helped soothe fears of a recession in the world’s largest economy.On Wall Street, stocks extended their biggest weekly percentage gains of the year. The Dow Jones Industrial Average finished up about 0.25% – bringing its weekly gain to 2.7% – while the S&P 500 and Nasdaq Composite both increased 0.2%; they were up about 3.7% and 5% on the week, respectively. MSCI’s main world stock index rose 0.5%, adding to its recovery from market turmoil last week generated by U.S. recession fears and foreign exchange gyrations. The pan-European STOXX 600 index rose 0.3% on the day, still hovering at its two-week high and logging its best week since May 6, up 2.4%.The VIX U.S. stock volatility index, broadly considered the market’s fear gauge, sat at benign levels of about 15 after hitting a four-year high of 65 early last week. The sharp turnaround in market sentiment came after a batch of U.S. data this week showed inflation was moderating and retail spending was robust. That has helped the market narrative move away from recession concerns, sparked by a weak U.S. jobs report in early August, to confidence the economy can keep growing. Softer inflation data has also reinforced expectations of an interest rate cut by the U.S. Federal Reserve in September.On Friday, a survey showed that U.S. consumer sentiment rose in August, driven by developments in the U.S. presidential race, while inflation expectations remained unchanged over the next year and beyond.Scott Wren, a Wells Fargo Investment Institute strategist, said stocks were reacting to the likelihood that while the economy is slowing, the probability of a recession is low and earnings estimates have edged higher. “Modest growth with moderating inflation is a good environment for stocks and bonds,” Wren said in an email. With central bankers from around the globe set to gather in Jackson Hole, Wyoming, next week, traders expect the Fed to lower borrowing costs from a 23-year high next month but have reduced their bets on an emergency 50-basis-point cut to 25%, down from 55% a week ago, the CME FedWatch tool showed. Invesco multi-asset fund manager David Aujla said the U.S. is unlikely to go into recession. But markets likely would be more volatile through to the end of this year, Aujla said, particularly around November’s U.S. presidential election. Easier U.S. Treasury yields on Friday partly unwound the previous session’s surges. The yield on the benchmark U.S. 10-year Treasury note declined 4 basis points to 3.883%.DOLLAR, OIL DECLINEIn Asia, Japan’s Nikkei share average climbed 3.6% on Friday and notched its best week in more than four years, while Hong Kong’s Hang Seng Index rose 1.9%.Japanese stocks gained following heavy losses last week after a surprise Bank of Japan rate cut sent the yen soaring against the dollar, wrecking yen-funded stock trades.The dollar fell against the yen on Friday, and was softer against other major currencies after disappointing U.S. housing numbers. U.S. single-family homebuilding fell in July as higher mortgage rates and house prices kept prospective buyers on the sidelines, suggesting the market remained depressed at the start of the third quarter. The euro added 0.47% versus the dollar.Oil prices settled down nearly 2%, with global benchmark Brent crude below $80 a barrel, but were little changed on the week as investors tempered expectations of demand growth from top oil importer China.Brent fell $1.36, or 1.7%, to settle at $79.68 per barrel and U.S. crude dropped $1.51, or 1.9%, to $76.65.Spot gold prices soared to an all-time high, rising more than 2%. [GOL/] More

NEW YORK (Reuters) -U.S. Treasury yields eased on Friday, partly reversing the previous day’s big gains as investors digested data showing a resilient U.S. consumer and inflation trending lower, leaving the Federal Reserve ample scope for a small interest rate cut next month.Treasuries ended lightly mixed after such an up-and-down week, and volatility subsided almost as dramatically as it spiked two weeks ago. The rise in volatility came after an unemployment rate reading sparked near-panic that the economy was heading for a recession rather than a soft landing. That briefly sent yields tumbling to levels not seen in more than a year as investors moved into the safety of Treasuries and jettisoned stocks. But this week healthy retail sales data and a smaller than expected rise in weekly unemployment claims on the heels of benign inflation readings earlier in the week restored confidence in the economic picture. That launched two-year and 10-year yields into their biggest rises in weeks as investors reversed course. Yields on bonds fall when their prices rise. “Yields are a little bit lower, so Treasuries are still looking pretty good. Bouncing back,” said Kim Rupert, managing director of fixed income at Action Economics in San Francisco.”It’s been super-volatile, so we are seeing some calming in the market. I think with a rate cut pretty much settled now for September, the markets are cheering that.”Rupert also said there was an uptick of safe-haven demand for Treasuries on Friday, mainly due to geopolitical risk factors such as the Middle East situation and the Russia-Ukraine war. Interest rate futures traders scaled back bets that the Fed would need to cut 50 basis points when it next meets in September. Based on the fed funds futures term structure, they now see a 74% chance of a 25 bps ease in the policy rate, which has been in a 5.25%-5.5% target range since the Fed stopped hiking rates in July 2023. Since there is no Federal Open Market Committee meeting in August, the market seeks a strong signal from Fed Chair Jerome Powell next Friday when he speaks at the U.S. Central Bank’s annual symposium in Jackson Hole, Wyoming.”Today is just a little bit of a pullback of yesterday’s oversized move. We kind of showed that you’re seeing cracks in unemployment, but the underlying trend hasn’t really collapsed,” said Jan Nevruzi, U.S. rates strategist at TD Securities in New York.”I think it will be harder for Powell to make the case that we need an outsized cut at next week’s Jackson Hole speech,” he said. Weak July housing starts and building permits data kept pressure on yields before they ticked a bit higher following the release of a stronger-than-expected preliminary August University of Michigan consumer sentiment survey reading of 67.8, up from July’s 66.4.Federal Reserve Bank of Chicago President on Friday told National Public Radio that the U.S. economy is not showing signs of overheating, so central bank officials should be wary of keeping restrictive policy in place longer than necessary.”You don’t want to tighten any longer than you have to,” Goolsbee said. “And the reason you’d want to tighten is if you’re afraid the economy is overheating, and this is not what an overheating economy looks like to me.”The yield on the benchmark U.S. 10-year note fell 3.6 bps from late Thursday to 3.89%, paring Thursday’s gain that was the biggest in a week. For the week it lost 5.2 bps. The two-year note yield, which typically moves in step with interest rate expectations and reached its highest since Aug. 2 on Thursday, was last down 3.7 bps at 4.0644%. Its 15.9 bps rise the previous session was the biggest since April 10. For the week it was less than 1 bp higher.The 30-year bond yield fell 3.3 basis points to to 4.1466%.The ICE BofA Merrill Lynch MOVE index of fixed income market volatility closed unchanged from Thursday at 103.74, but well below last week’s peak at 121.22, which was the highest since Jan 4.The closely watched gap between yields on two- and 10-year Treasury notes, considered a gauge of growth expectations, was at negative 17.6 bps, barely changed from late Thursday. An inverted yield curve is generally seen as pointing to a recession. During the market freak-out early last week, hopes of an aggressive September easing shifted the gap between 2- and 10-year yields to a positive 1.5 bps, the first time the curve had a more normal upward slope since July 2022.The implied breakeven inflation rate on 10-year Treasury Inflation Protected Securities (TIPS) fell to 2.0820% from 2.1150 late Thursday. The five-year TIPS breakeven inflation rate fell back below 2% to 1.9703%. This suggests that investors think annual inflation will average below the Fed’s 2% target rate for the next five years. More

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Here’s your guide to the week ahead in financial markets from Ira Iosebashvili and Lewis Krauskopf in New York, Naomi Rovnick and Nina Chestney in London, and Kevin Buckland in Tokyo.1/ JACKSON HOLE Central bankers from around the globe gather in Jackson Hole, Wyoming, from Thursday for the Fed’s annual conference to chart the way forward for monetary policy. In focus this year are labour markets – a shift away from last year’s inflation theme. U.S. Fed chief Jerome Powell gets a chance to fine-tune his message before September’s monetary policy meeting. Most market participants believe the Fed will begin cutting rates next month, after months of keeping them elevated to tamp down inflation. How big the world’s foremost central bank will go, and how deeply it will eventually cut, remain open questions: a spate of recent alarming economic data – including unemployment numbers – pushed investors to ramp up bets on a 50 basis point cut in September. 2/ MIXED PICTUREThe outlook for global growth is another piece of the puzzle. Markets are febrile and struggling to assess the economic outlook as business activity softens but inflation stays above central banks’ target levels. Purchasing managers’ indexes deliver a real-time snapshot of economic activity and – with most of them out on Thursday – will provide the next set of clues. July’s PMIs suggested an economic slowdown combined with persistent inflation, showing why central banks are in a bind. U.S. manufacturing activity weakened and German numbers were surprisingly dour, indicating Europe’s economic powerhouse is contracting. But manufacturers’ input prices in advanced economies hit an 18-month high. Inflation will dictate the pace and depth of future rate cuts. A repeat of July’s dour PMI trends might mean monetary easing happens more slowly than markets would like. 3/ IRATE OVER RATES The Bank of Japan’s sudden pivot from uber-dove to ultra-hawk has put it in the firing line for lawmakers, after peppering its surprise rate hike at the end of July with hints of more to come.One unexpected result was the steepest rout for Japanese stocks since 1987’s infamous Black Monday, amid a destabilizing spike in the yen against the dollar.Politicians set to grill BOJ Governor Kazuo Ueda and his peers on Aug. 23 will do well to remember some of their most senior figures were leaning on the central bank to help reverse the yen’s exceptional weakness in the run-up to the move. Recent macroeconomic indicators at least have been on the BOJ’s side, showing a stronger-than-expected rebound in growth amid a recovery for consumption. A potentially bigger test comes the day of the special parliamentary session, with the release of the latest consumer price figures.4/ DEMOCRATS ON DISPLAYThe U.S. presidential race heats up again with the Democrats aiming to generate fresh momentum for the candidacy of Vice President Kamala Harris at the party’s convention in Chicago.Since her late entry into the race after President Joe Biden stepped aside, Harris has galvanized Democrats and erased the lead of Republican candidate Donald Trump in some opinion polls, edging ahead of Trump in some betting markets ahead of the Nov. 5 vote.The four-day convention kicks off on Monday with a series of high-profile Democrats expected to give speeches geared toward rallying support for Harris. The race is tight and investors are hoping to learn more about her policy positions. Harris has been at pains to emphasize she would never interfere in Fed independence – a view that contrasts sharply with that of the Republican nominee and former president, who said presidents should have a say on Fed decisions.5/ TENSIONS A confluence of risk factors has pushed and pulled global energy markets in recent days, and there is little sense that will abate. Concern that conflict is spreading in the Middle East and threatening supply from the region has lifted international crude prices above $80 a barrel. At the same time, worries about the strength of demand, particularly in China, are somewhat limiting oil’s gains.European wholesale gas prices meanwhile have been volatile, with the spectre of Russian gas supply disruption on a transit route via Ukraine amplifying Middle East concerns. Markets are concerned that heavy fighting near the Russian town of Sudzha, where Russian gas flows into Ukraine, could result in a sudden stop to transit flows via the war-torn nation before a five-year deal with Russia’s Gazprom (MCX:GAZP) expires. (Graphics by Pasit Kongkunakornkul, Sumanta Sen, Vineet Sachdev; Compiled by Karin Strohecker; Editing by Jan Harvey) More

” If we move toward less restrictiveness, it will help ease some of these credit conditions,” Goolsbee said after suggesting credit conditions appear tight and flagging some economic factors that are “flashing yellow.” Goolsbee outlined a myriad of issues of concern including rising unemployment and small business defaults. “Small business defaults are increasing … this is becoming a cause for concern,” he said, adding that rising unemployment is a “warning sign.”The Chicago Fed president said that the speed of transmission of lower rates will “depend on many factors,” but signaled support for a “gradual” rather than fast pace of rate cuts.    More

WASHINGTON (Reuters) – Unemployment in Texas rose moderately in July, suggesting that Hurricane Beryl had a minor impact on the labor market and confirming the sharp slowdown in U.S. job growth last month. The Labor Department’s state employment and unemployment report on Friday showed the jobless rate in Texas, which was slammed by Beryl in the second week of July, rose to 4.1% last month from 4.0% in June. Nonfarm payrolls in the state decreased by 14,500 jobs amid a marginal drop in the leisure and hospitality sector and sharp decline in professional and business services.There had been speculation that Beryl was a significant factor in the small rise in nonfarm payrolls in July and surge in the national jobless rate to near a three-year high of 4.3%.”This is not material enough to account for anything more than a small part of the slowing in payroll gains in the month,” said Conrad DeQuadros, senior economic advisor at Brean Capital.The drop in Texas’ payrolls compared to the monthly average increase of about 20,000 over the past year. Some economists had anticipated a sharp rebound in payrolls and drop in the unemployment rate in August as a result.”This suggests some upside for August in the state, but likely not a windfall in hiring,” said Ben Ayers, senior economist at Nationwide. Unemployment rates increased in 13 states last month, with the largest rises in Massachusetts, Michigan, Minnesota and South Carolina. Michigan and South Carolina have a heavy concentration of motor vehicle assembly plants. Automakers typically idle assembly lines in July for new model retooling.Jobless rates were little changed in 36 states and the District of Columbia. Payrolls rose in New York and Oregon, but dropped by 22,400 jobs in Missouri, mostly in manufacturing. That could reflect the temporary auto plant shutdowns. Payrolls were more or less unchanged in 47 states and the District of Columbia.”This aligns with a broader pattern of slower job gains, but there is little sign of a collapse within state labor markets,” Ayers said.Labor market momentum is slowing as 525 basis points worth of interest rate hikes from the Federal Reserve in 2022 and 2023 curb hiring. Layoffs, however, remain historically low. The U.S. central bank has maintained its benchmark overnight interest rate in the current 5.25%-5.50% range for more than a year. The Fed is expected to start its easing cycle next month. More

BERLIN (Reuters) -Germany’s coalition government reached a deal on Friday to narrow its 2025 budget deficit target from 17 billion euros ($19 billion) down to 12 billion euros, in a compromise aimed at salvaging the spending plan after the original proposals fell apart.The cabinet approved its 2025 budget in July after months of wrangling but left open how to reduce the gap between projected spending and revenue. Finance Minister Christian Lindner said then that the government’s intention was to reduce the shortfall to 9 billion euros.”It would be better if it was in single-digit figures,” Lindner said on Friday about the newly agreed target of 12 billion euros. “This is somewhat higher than I would wish for as finance minister.”The government agreement paves the way for a draft budget plan to be submitted to parliament on Friday, keeping the legislation on track for approval by the end of the year.Under the deal, the infrastructure division of Deutsche Bahn will be given 4.5 billion euros in equity, which will replace subsidies that were included in the previous version of the draft budget.In addition, Deutsche Bahn will receive a loan of 3 billion euros from the government, which can be used to redeem infrastructure bonds previously issued on the market. “Compared to the July decision, we have decided to invest in transport infrastructure with additional capital and loans for Deutsche Bahn and have made further general savings,” German Chancellor Olaf Scholz said on Friday about the agreement. The draft budget for 2025 includes a total of 15.1 billion euros in investments for rail infrastructure. The equity injection and the loan do not count towards the debt brake, which limits public borrowing to 0.35% of gross domestic product. “The debt brake is therefore respected and all the measures that we have now introduced, for example giving loans and equity to the railway, are designed in such a way that they are absolutely in line with the constitution,” Lindner said.The constitutionality of the different options to narrow the gap was carefully studied, as the government was trying to avoid the chaos of November 2023, when a court ruling blew a 60 billion-euro hole in the public finances and threw the government’s financing framework into turmoil.Options under scrutiny in July had included converting the grants of national rail operator Deutsche Bahn and the highway company into loans, as well as using extra funds from state bank KfW. The advisory board to the Finance Ministry had said those options were problematic and new options had to be found. The government will also get 300 million euros extra from energy utility Uniper, as the company will pay 2.9 billion euros instead of 2.6 billion as it has set aside more funds for the payment obligation to the federal government for aid received in 2022.Other measures include a 200-million-euro reduction in the provision for the loss of tax revenue from the European Union energy crisis fund. “The budget legislators can now begin their deliberations on next year’s budget right on time after the parliamentary summer break,” Scholz said. The Bundestag will begin debating the budget plan in the second week of September. The Budget Committee then carries out a final review on Nov. 14, and the budget should pass both houses of parliament before the end of the year.Lindner said on Friday that he expected the projected budget gap could be further reduced by November.($1 = 0.9080 euros) More