Market Brief: Traders Turn Cautious in Run-Up to Jackson Hole

Good morning, and welcome back. In the US, ten-year Treasury yields are holding near last week’s levels, equity futures are setting up for a modest advance at the open, and the dollar is trading near a three-week low against most of its major rivals. The euro is trading lower given that there’s been no appreciable unwinding in geopolitical risk after presidents Trump and Putin emerged from a meeting in Alaska without anything resembling a deal to end the war in Ukraine. And measures of risk appetite are creeping lower across the G10 currency space as traders brace for Federal Reserve chair Jerome Powell’s speech at the Jackson Hole Economic Symposium on Friday.

Markets are firmly convinced that the Fed will cut rates at its September meeting, yet data released over the past two weeks has failed to make a conclusive case for easing.

Job growth slowed sharply in the three months to July. Just 73,000 employees were added to non-farm payrolls in the month, while gains over the prior two months were revised down significantly by a cumulative 258,000, suggesting that firms put hiring plans on hold as they faced elevated uncertainty stemming from the administration’s economic policies.

However, the unemployment rate held firm, and average hourly earnings ticked up. A demographically-driven drop in the “breakeven” level (the pace of job creation needed to keep unemployment rates and wage gains stable) is something that the Fed has long anticipated, with some estimates putting it somewhere between 80,000 and 100,000 a month as net immigration levels fall and older workers age out of the labour force—meaning that officials may not regard the recent deceleration with any great alarm.

Price pressures began to build. The most widely-watched measure of underlying inflation—the core consumer price index—climbed an uncomfortably-hot 3.1 percent in the year to July as core goods prices popped of deflationary territory and services prices rose, and a gauge of factory-gate prices rose 0.9 percent month-over-month, marking its fastest acceleration in three years. Based on these inputs, the core personal consumption expenditures index—the Fed’s preferred inflation metric—is likely to have risen 2.9 percent in July, and is widely expected to push well above the 3 percent threshold in the months ahead as tariff increases and labour supply constraints are passed through*.

Consumer spending remained strong. Control group retail sales climbed 0.5 percent month-over-month in July and June’s reading was revised upward from 0.3 percent to 0.8 percent, pointing to continued resilience among American households—and to the possibility that “wealth effects” are helping cushion the blow to sentiment and consumption patterns. Partly propelled by artificial intelligence speculation, the 'Buffett indicator'—the ratio of total US stock market value to gross domestic product—has hit an all-time high, making it the most expensive stock market in history, and enriching the cohort of households near the top of the income spectrum that drive a significant share of overall consumption.

To us, this means that Chair Powell could deliver a surprisingly non-committal message when he opens the Jackson Hole conference on Friday morning. We had previously expected a more dovish outcome, but now think that a repeat of last year’s event—in which he said “upside risks to inflation have diminished, and the downside risks to employment have increased,” and put a September rate cut on the table by saying “the time has come for policy to adjust”—has become much less likely. Our view could change when minutes from the central bank’s last meeting are released on Wednesday and the latest round of purchasing manager indices drops on Thursday, but for now, it seems reasonable to think that Powell will push back against market pricing by repeating his comments from the July press conference. This would give his colleagues room to assess the August inflation and payrolls data before coming to a determination in September, and could potentially force yields and the dollar a little higher.

Tomorrow’s Canadian inflation report should remain too hot for comfort. Headline price growth is seen staying at 1.9 percent year-over-year for a second month as April’s carbon tax removal keeps annual comparisons artificially depressed, but the central bank’s preferred trim and median core measures are likely to hold close to the 3 percent threshold for now as retaliatory tariffs and still-resilient consumer spending levels translate into upward pressure on prices.

The difference between US and Canadian overnight rates is still near a 25-year low—but this isn’t expected to last long, with overnight index swap pricing showing the Fed delivering five rate cuts over the next year, against just one from the Bank of Canada. We think this leaves ample scope for shifts in market positioning in the months ahead. Investors could see sentiment wobble in early September if incoming data suggest a more hawkish path for US policy and a more dovish one for Canada. Yet this dynamic seems likely to reverse over time as the lagged impact of tariff increases weighs on US growth. If correct**, this would leave the Canadian dollar vulnerable in the near term, but could pave the way for a move higher toward year-end.

*Note that there is very little debate about this: most economists, on both ends of the political spectrum, expect measures of inflation to accelerate in the months ahead. The duration and impact on consumer expectations is where opinions differ.

**Please remember that God invented economists to make astrologers look good, and then invented currency strategists to make the economists look good.

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