Markets are holding onto the possibility of a 50 basis points rate cut for September. Société Générale notes that the central theme of Jackson Hole will centre on the labour market.
Fed policymakers are debating whether the tightness in the labour market is due to weaker participation or a broader economic slowdown. The September decision will focus more on the labour market outlook rather than price trends. Rising prices might increase the chances of rate cuts as they could negatively impact growth prospects.
Jackson Hole will be the first opportunity for scrutiny of the Fed’s communication. However, events like the Non-Farm Payrolls on 5 September and Consumer Price Index on 10 September are expected to have a greater influence on market expectations.
If the upcoming jobs data disappoints again, markets might explore the potential for a 50 basis points rate cut next month.
With the Jackson Hole symposium approaching, our focus is now squarely on the labour market. Fed policymakers are debating whether employment tightness is a structural issue or a sign of a slowing economy. The outcome of this debate will likely dictate the path of interest rates for the remainder of the year.
We are seeing clear signs of softening in the job market, which supports the case for rate cuts. The last Non-Farm Payrolls report for July came in at a disappointing 115,000, well below the 190,000 consensus, and the unemployment rate has now ticked up to 4.2%. This follows a trend of weakening labour data over the past quarter, increasing pressure on the Fed to act.
Complicating the picture, however, is that core inflation remains sticky, with the latest CPI reading holding at 3.8%. This puts the Fed in a difficult position, balancing the need to support growth against the risk of reigniting price pressures. A weak jobs report could force their hand, making them prioritize the growth outlook over inflation.
For traders, this means volatility is the main play leading into the first week of September. Implied volatility on index options, as measured by the VIX, has already climbed to over 19, and we expect it to rise further ahead of the key data releases. Positioning for a significant market move, rather than a specific direction, could be a prudent strategy.
This situation reminds us of the Fed’s pre-emptive pivot back in 2019, when they cut rates due to global growth fears despite a relatively strong domestic economy. That history suggests officials may be willing to look past a single inflation reading if they perceive a credible threat to the labour market. Therefore, the upcoming NFP report on September 5th is now the most critical catalyst on our radar.
If that jobs data disappoints again, market pricing will aggressively test the probability of a 50 basis point rate cut in September. Traders should be prepared for significant repricing in interest rate futures and currency markets immediately following the release. The market is coiled for a big move, and this report will likely be the trigger.
