Noticias del mercado & perspectivas

First – let us just say that as we suspected the AUD jolted all over the place on the release of the May CPI – the read was much stronger than consensus and the fallout from the read ongoing. But, and it’s a but, we predicted the AUD’s initial bullish reaction was counted by once again point to the fact parts of the monthly read can be explained away by changes made in May 2023. With that trade taken care of – we need to look to how things might transpire over the next period.

And that means digging through the monthly read for what matters and what doesn’t and thus start to assess an environment where the ‘frighten hawk’ that is the RBA moves on rates. May CPI 4.0% year on year – highest read since November 2023 So where are we? The non-seasonally adjusted monthly CPI indicator for May 2024 came in at 4.0% year-on-year smashing market consensus 3.8%, marking the highest rate since November 2023, the third consecutive monthly rise and marking 5 months since inflation was on a downward trajectory.

This jump needs to be put into context too April 2024 CPI was 3.6% year on year, the trough of 3.4% year on year observed from December to February feels like a distant memory. However as we mentioned above the market has found reason to back track on its initial bullishness most likely due to the month-over-month CPI in May 2024 decreased by -0.1% aligning with the 'seasonal average' of -0.1% since 2017. Compare that to the +0.7% month on month increase in April 2024, well above the seasonal average of +0.3%.

However the RBA doesn’t use headline CPI seasonally adjusted or not – it cares about core inflation which strips out the top and bottom 15%. And that means looking at trimmed mean CPI. The trimmed mean CPI, spiked to 4.4% year on year, also the highest reading since November 2023.

This marks a significant reacceleration from the 3.8% year on year low in January and the 4.1% year on year rate seen last month. As has been the case for most of 2024 goods inflation has remained steady holding around 3.3% year on year. The issue is services inflation which has surged to 4.8% year on year.

Another part of the inflation ‘story’ as to why inflation is so high has been global supply. However, the data has proven this to be false. Tradables (inflation that has international exposure) although rebounding in May to 1.6% from 1.1% is well below current inflation issues.

Non-tradables (domestic only facing inflation) remains well above target at 5.2% in May from 5.0% in April. This is a domestic-led spending issue and why the RBA is in play. Key Date: 31 July Second quarter CPI is out July 31 – as mentioned in Part 1 there is still some inputs that will be released in the coming 4 weeks that will shift expectation and consensus.

But in the main the consensus read now are pretty close to the final reads. The headline CPI is now expected to rise by 1.0% quarter on quarter (range 0.7% - 1.2) and 3.9% year on year (range 3.6% to 4.1%), above the RBA's May 2024 Statement on Monetary Policy (SOMP) forecast of 3.8% but possibly ‘tolerable’ but only just. A caveat to this figure is fuel price expectations for June, which sits at a decline of -1% month on month, which would subtract approximately ~4 basis points from the headline CPI.

But we digress as the trimmed mean consensus forecasts however are a concern and might not be tolerable for the RBA. Consensus forecasts for trimmed mean sits at 1.0% quarter on quarter (range 0.8 to 1.1%) and for a year on year increase of 3.9% year on year rise (range: 3.7% to 4.1%) also above the RBA's forecast of 3.8% year on year. Any slip into 4% on the trimmed mean figure and Augst 6 will be green lit.

The trade So how to position for the coming 5 weeks ahead of the August 6 meeting. Firstly understand that consensus amongst the economic world is the August meeting has a 35% risk of seeing a hike. The market is stronger at 45% - however it was as high as 61% at the peak of the bullishness post the inflation drop.

We should also point out that pre-June 5 the pricing in the market was for cuts not hikes. Showing just how fast and hard the interbank and bond markets have swung around. We also need to return to Governor Bullock's hawkish June press conference where the Board considered a rate hike and did not entertain a rate cut.

We also pointed out that every time the Board has added this sentence to the statement: The Board remains resolute in its determination to return inflation to target and will do what is necessary to achieve that outcome. It has seen a rise in the preceding meeting. We believe this give the upside potential more impetus and that will positively push the AUD higher over the coming weeks something we think is not fully factored into trading to date.

Then there are the other asset classes. Hikes complicates the outlook for equities, particularly as inflation remains sticky, especially in the services. Thus which sectors and areas of the equity market sure we be on the look to for signs of stress?

A prolong period of weakness in domestic trading conditions and the likely rise of frugal consumer behaviour will present challenging earnings for first half of fiscal year 2025 for discretionary and service sector stocks. Couple this with evidence of a slowdown in housing activity, material handling, product and construction stock are also likely to face pressure in early FY25. Need to also address Banks – which have been one of the best trades in FY24 with CBA leading the pack here, the question that remains however is that bank price growth in FY24 has been due to rate cut expectations and optimistic credit-quality risks.

This explains the elevated bank trading multiples. Weakening housing activity, will likely see investors questioning multiples of this nature in the near future. Trading the inflation story over the coming 5 weeks will be fascinating.

We have been discussing Sahms’ law for the last few weeks. This is the regression indicator that signals the possibility of recession. For those that can't remember, Sahms' recession indicator is when the three-month moving average of the unemployment rate has risen by more than 0.5 per cent from the previous 12 month low.

Every time this has happened since 1950 the US has entered a recession. Which brings us to last Friday’s non-farm payroll (NFP). NFP August jobs report revealed that total nonfarm payrolls grew by just 142,000, while private sector job growth amounted to a meagre 118,000.

That is the lowest read since COVID and both figures fell well short of consensus expectations. Even more concerning, revisions to June and July payrolls subtracted a combined 86,000 jobs, further underscoring the weakness in the labour market. That is on top of the 816,000 downward revisions of the January through May figures which saw the NFP overestimating the monthly employment figures by 69,000.

The next piece of the puzzle – a piece that backs the Sahms’ law puzzle is the three-month average for private sector job growth has now fallen below 100,000 per month, a pace that typically signals the onset of a recession.. However some are pointing to the fact that the unemployment rate ticked down slightly from 4.3 per cent to 4.2 per cent in August as a mixed signal and that maybe things aren’t as bad as the headlines. However this modest improvement was largely due to rounding, as the unrounded rate was effectively unchanged (4.22 per cent in August vs. 4.25 per cent in July).

This followed an earlier increase in unemployment, which had been trending higher over the past few months. The rise in the unemployment rate, combined with slowing job growth, indicates that the labour market is likely to weaken further unless the Fed moves to ease policy – which is why we are asking – has the Fed dropped the ball by not moving already? Let’s explore that further Data from the Job Openings and Labor Turnover Survey (JOLTS) shows that firms are hiring at the slowest rate in a decade, outside of the pandemic period.

Job openings fell to 7.673 million in July, which was significantly faster than expected and brought the ratio of job openings to unemployed persons to 1.07-to-1, down from the elevated levels seen during the pandemic. This decline in job openings suggests that the labour market is normalising, but it also raises the risk of a sharper increase in unemployment in the coming months as the ratio inverts. It's not only the multitude of employment indicators flashing risk.

Other indicators reinforce the case for concern. Take the auto sales numbers, which fell below expectations, with an annualised sales rate of 15.1 million vehicles, suggesting there is now a slowdown in consumer spending. The decline in auto sales historically spreads to weaker production and employment in the auto industry, as companies adjust staffing levels in response to reduced demand.

Meanwhile, mortgage applications for new home purchases remain subdued despite a drop in mortgage rates over the last four months on rate cut expectations. The lacklustre performance in both the auto and housing markets adds to the broader picture of economic weakness. The signs are pretty clear- the slowdown is on and as the Fed weighs its options ahead of the September meeting – the final piece of the puzzle is coming inflation.

It must be said that inflation remains a key focus. Core Consumer Price Index (CPI) inflation is expected to rise by just 0.2 per cent month-on-month in August, reinforcing the view that inflation has slowed considerably, but year on year CPI is still above the Fed 2 per cent target. Inflationary pressures are easing and the greater risk to the Fed's mandate appears to be the labour market rather than inflation, but it could be the moderator on those calls for the Fed to go hard when it starts cutting.

We need to watch categories like medical services and airfares as these are ones we need to see bigger falls in the rates of price growth and could influence the Fed's decision-making. But again, the overall trend suggests inflation is no longer the primary concern. Similarly, the Producer Price Index (PPI) is expected to show a modest increase of 0.2% month-over-month, further indicating that inflationary pressures are tapering off.

Jobless claims data will also be closely watched in the coming weeks. Continuing claims are expected to rebound after an unexpected drop, driven in part by a temporary decline in claims in Puerto Rico. Any significant rise in jobless claims, particularly initial claims, could signal a shift towards more active layoffs.

Can they catch the ball? All the data mentioned highlight our concerns about the trajectory of the U.S. economy. There are clear signs of a substantial slowdown and growing risk of recession.

Thus the question now is can the Fed catch slowdown before it turns into a recession? The answer is muddled as the Federal Reserve's response to the weakening outlook remains uncertain. The base case is for the Fed to initiate a series of rate cuts in the coming months.

Currently, projections indicate that the Fed may cut rates by 50 basis points (bp) in September followed by a smaller 25 bp cuts over the proceeding meetings. However, the pace and magnitude of these cuts remain open to adjustment, depending on the evolving economic conditions. While this is the view of the market, the Fed is not as united as this – for example: Federal Reserve Governor Christopher Waller has expressed a more measured approach.

In his September 6, 2024 speech, Waller emphasised that he prefers to see more data before endorsing larger rate cuts of 50 bp rather than the more conservative 25 bp. He signalled that the Federal Open Market Committee (FOMC) needs to remain flexible and should adjust its actions based on new data rather than adhering to preconceived timelines for rate cuts. The issue with this view is that data is retrospective and by the time it's presented it would be too late to catch the slowdown.

He expressed willingness to support larger cuts if the data shows further deterioration, drawing parallels to his previous support for front-loading rate hikes when inflation surged in 2022. But again – the argument against this stance is it could be too little too late. Waller’s remarks suggest that the Fed could adopt a cautious approach in September, potentially starting with a 25 bp cut but leaving room for larger cuts if economic data continues to weaken at either the November or December meeting.

So could the Fed drop the ball? We think the word to use here is “fumble”. There are clear signs of disagreements around, size, speed and effects of cuts, which may cause them to fumble the response in the interim, over the medium term it will align, whether they catch or drop the ball – time will tell.

In short – we are in for a volatile period in FX, already the USD has been falling on rate fundamentals, but rallies on recession fears. The drive to safe havens over risk plays will be a strong theme in the coming period and will likely override any interest rate differential trade plays that present. It is going to be an interesting period culminating in the US election in November, thus be ready to be nimble and accept swings that seem to go against traditional trading theories.

So FY24 earnings are now done and from what we can see the results have been on the whole slightly better than expected. The catch is the numbers that we've seen for early FY25 which suggested any momentum we had from 2024 may be gone. So here are 8 things that caught our attention from the earnings season just completed.

Resilient Economy and Earnings Performance Resilience surprises remain: The Australian economy has shown remarkable resilience despite higher inflation and overall global pessimism. The resilience was reflected in the ASX 300, which closed the reporting season with a net earnings beat of 3 percentage points - a solid beat of the Street's consensus. This beat was primarily driven by better-than-expected margins, indicating that companies are effectively managing cost pressures through flexes in wages, inventories and nonessential costs.

The small guy is falling by wayside: However, the reporting outside of the ASX 300 paints a completely different picture. Over 53 per cent of firms missed estimates, size cost efficiencies and other methods larger firms can take were unable to be matched by their smaller counterparts. The fall in the ex-ASX 300 stocks was probably missed by most as it represents a small fraction of the ASX.

But nonetheless it's important to highlight as it's likely that what was seen in FY24 in small cap stocks will probably spread up into the larger market. Season on season slowdown is gaining momentum Smaller Beats what also caught our attention is the three-percentage point beat of this earnings season is 4 percentage points less than the beat in February which saw a seven-percentage point upside. That trend has been like this now for three consecutive halves and it's probable it will continue into the first half of FY25.

The current outlook from the reporting season is a slowing cycle, reducing the likelihood of positive economic surprises and earnings upgrades. Dividend Trends Going Oprah - Dividend Surprises: Reporting season ended with dividend surprises that were more aligned with earnings surprises, with a modest DPS (Dividends Per Share) beat of 2 percentage points. This marked a significant improvement from the initial weeks of the reporting season when conservative payout strategies led to more dividend misses.

The stronger dividends toward the end of the season signal some confidence in the future outlook despite conservative guidance. However, firms that did have banked franking credits or capital in the bank from previous periods they went Oprah and handed out ‘special dividends’ like confetti. While this was met with shareholder glee, it does also suggest that firms cannot see opportunity to deploy this capital in the current conditions.

That reenforces the views from point 2. Winners and Losers - Performance Growth Stocks Outperform: Growth stocks emerged as the clear winners of the reporting season, with a net beat of 30 percentage points. This performance was driven by strong margin surprises and the best free cash flow (FCF) surprise among any group.

However, there was a slight miss on sales, which was more than offset by higher margins. Sectors like Technology and Health were key contributors to the outperformance of Growth stocks. Stand out performers were the likes of SQ2, HUB, and TPW.

Globally-exposed Cyclicals Underperform: Global Cyclicals were the most disappointing, led by falling margins and sales misses. The earnings misses were attributed to slowing global growth and the rising Australian Dollar. Despite these challenges, Global Cyclicals did follow the dividend trend surprised to the upside.

Contrarian view might be to consider Global Cyclicals with the possibility the AUD begins to fade on RBA rate cuts in 2025. Mixed Results in Other Sectors: Resources: Ended the season with an equal number of beats and misses. Margins were slightly better than expected, and there was a positive cash flow surprise for some companies.

However, the sector faced significant downgrades, with FY25 earnings now expected to fall by 3.2 per cent. Industrials: Delivered growth with a nine per cent upside in EPS increases, although slightly below expectations. Defensives drove most of this growth, insurers however such as QBE, SUN, and HLI were drags.

Banks: Banks received net upgrades for FY25 earnings due to delayed rate cuts and lower-than-expected bad debts. However, earnings are still forecasted to fall by around 3 per cent in FY25. Defensives: Had a challenging reporting season, with net misses on margins.

Several major defensive stocks missed expectations and faced downgrades for FY25, which led to negative share price reactions. Future Gazing - Guidance and Earnings Outlook Vigilant Guidance has caused downgrades: As expected, many companies used the reporting season to reset earnings expectations. About 40 per cent in fact provided forecasts below consensus expectations, which in turn led to earnings downgrades for FY25 from the Street.

This cautious approach reflects the uncertainty in the economic environment and the potential for slower growth ahead, which was reflected in the FY24 numbers. Flat Earnings Forecast for FY25: The initial expectation of approximately 10 per cent earnings growth for FY25 has completely evaporated to just 0.1 per cent growth (yes, you read that correctly). This revision includes adjustments for the treatment of CDIs like NEM, which reduced earnings by 2.8 percentage point, and negative revisions in response to weaker-than-expected results, guidance, and lower commodity prices.

Resources were particularly impacted, with a 7.7 percentage point downgrade, leading to a forecasted earnings decline of 2.8 percent for the sector. Gazing into FY26: Early projections for FY26 suggest a 1.3 percent decline in earnings, driven by the expected declines in Resources and Banks due to net interest margins and commodity prices. However, Industrials are currently projected to deliver a 10.4 percent EPS growth, would argue this seems optimistic given the slowing economic cycle.

The Consensus Downgrades to 2025 Earnings: The consensus for ASX 300 earnings in 2025 was downgraded by 3 per cent during the reporting season. This reflects a broad range of negative revisions, with 23 percent of stocks facing downgrades. Biggest losers were sectors like Energy, Media, Utilities, Mining, Health, and Capital Goods all saw significant consensus downgrades, with Media particularly facing downgrades as budgets are slashed in half.

Flip side Tech, Telecom, Banks, and Financial Services, saw aggregate earnings upgrades. Notably, 78 percent of the banking sector received upgrades, reflecting some resilience in this group. Cash Flow and Margin Surprises Positive Cash Flow: Operating cash flow was a positive surprise, with 2 percentage point increase for Industrial and Resource stocks reporting cash flow at least 10 per cent above expectations.

The main drivers of this cash flow surprise were lower-than-expected tax and interest costs, along with positive EBITDA margin surprises. Capex: There were slightly more companies with higher-than-expected capex, but the impact on overall Free Cash Flow (FCF) was modest. Significant positive FCF surprises were seen in companies like TLS, QAN, and BHP, while WES, CSL, and WOW had negative surprises.

Final nuts and bolts Seasonal Downgrade Patterns: The peak in downgrades typically occurs during the full-year reporting season, so the significant downgrades seen in August are not necessarily a negative signal for the market. As the year progresses, the pace of downgrades may slow, and there could be some positive guidance surprises during the 2024 AGM season. However, with a slowing economic cycle, the likelihood of positive surprises is lower compared to 2023.

Overall, the reporting season highlighted the resilience of the Australian economy and the challenges facing certain sectors. While Growth stocks outperformed, the outlook for FY25 remains cautious with flat earnings growth and sector-specific headwinds. Investors will need to navigate a mixed landscape with potential opportunities in contrarian plays like Global Cyclicals, but also be mindful of the broader economic uncertainties.

We now have a post-Jackson Hole set of questions – will the data stick up to what was preached. Reviewing the reactions to Jackson Hole treasury yields declined on a ramp up in bets around the Federal Funds rate after Federal Reserve Chair Jerome Powell's dovish remarks, which were in line with what we forecasted last week. His dovish remarks were enough to shift market expectations for the September Federal Open Market Committee (FOMC) meeting not just towards a potential rate cut, but to a possible heavier cut (50 basis points or more).

Current market pricing for September is above 30 basis points suggesting it is keeping some of its powder dry ahead of the mid-September meeting. But it wasn’t the absolute nail in the hawkish view some were hoping. The current economic environment is making markets highly reactive.

Every piece of data that could indicate whether the U.S. economy is heading for a "hard" or "soft" landing is being scrutinised. That is particularly evident post the softer employment data released in early August, and thus we traders still have plenty of volatility to play with in the coming weeks. Jackson Hole in review Chair Powell's remarks at Jackson Hole signalled the shift in the Fed's focus we all expected.

But it is where the focus has shifted to that matters – the Board’s focus has shifted from inflation to labour market concerns. He emphasised that the Fed does not seek further cooling in labour market conditions and noted that the labour market is looser now than it was in 2019 when inflation was below 2%. While Powell did not specify the size of potential rate cuts, he indicated that the current policy rate gives the Fed ample room to respond to any risks, suggesting that rates are still far from neutral and could return to that level relatively quickly.

The market has taken this change in focus to pencil in the next most important date into its calendar – September 6. This is when the August employment data will be released, and it will be crucial in determining whether the Fed opts for a 25 basis point or a 50 basis point rate cut 10 or so days later. If the unemployment rate remains at 4.3% or rises further, comments suggesting that the labour market is “strong” would appear to be out of touch, and language like this sounds eerily similar to the previous underestimation of inflation being "transitory." So lets drill into what will be the biggest driver of FX and indices ahead of the September meeting - labour The Labour Market the Key to all In the coming weeks, the most critical economic data will revolve around the labour market, as its health will determine whether consumer spending and overall economic activity has remained strong.

The Bureau of Labor Statistics recently estimated that payroll employment as of March 2024 is 818,000 lower than initially thought. Think about that for one second, that is the entire population of the Gold Coast and 80,000 more or to put into Australian numbers its 60,000 jobs less than originally suggested. This has moved the average monthly figure down by 68,000 jobs for the period from April 2023 to March 2024 going from 247,000 a month to 179,000 a month.

The Fed needs to average 200,000 for the economy to be running at neutral. Although these revisions are not finalised until February 2025, the significance is clear - the jobs market is not as strong as previously believed and suggests like we discussed last week that the US could be skidding into a recession based on the Sahms recession indicator. Which is when the three-month moving average of the national unemployment rate is 0.5 percentage point or more above its low over the prior twelve months.

This was triggered in early August and we saw what that led to. What has also caught traders off guard is that historically, revisions to payrolls have been to the upside versus preliminary estimates, mainly due to delays in receiving more complete data from the Quarterly Census of Employment and Wages (QCEW). But when we look at periods of economic stress, take 2009 for example, the final estimates have sometimes shown even larger downward revisions than what we have seen this year.

This trend might be due to the overestimation of factors like the birth-death adjustment and part-time to full-time payrolls, which could be happening again now. If 2024 estimates are indeed overstated, it suggests that July's job growth was more likely to be 114,000 jobs, a figure that may not be confirmed until the next year's benchmark revisions. But a massive USD risk whatever the final figure turns out to be.

We stated last week that despite USD dovish trading over the past few weeks. It’s far from overdone. And we see the labour force data for the rest of the year being key to possible further selling Divergence Between Payroll Growth and Unemployment That brings us to the growing divergence between strong payroll job growth and rising unemployment.

We need to point out here this is not just a US phenomenon, Australia is seeing this situation as well, and it’s to do with the participation rate which is sneaking up. This means more people are falling back into the employment surveys suggesting unemployment might be higher than reported. So despite the robust employment growth figures – unemployment is on the rise faster than growth.

Housing Market Switching to the other great indicator for the Fed and FX traders alike – housing. Existing home sales rose modestly in July, yet new home sales increased at a surprisingly strong pace – however thankfully they remain within recent ranges. Despite a recent decline in mortgage rates (see the 30-year rates as the benchmark here), there has been no significant uptick in new demand, with mortgage applications for purchases remaining low and higher-frequency sales indicators still soft.

Although not on the same level as the labour market for FX movements, signs of overconfidence, increased mortgage applications and existing home sales spikes would get the FOMC’s hawks crowing again. These members have suggested that there hasn’t been sufficient housing stress yet to signal a hard sustained cutting cycle is imminent making housing data the contrarian trade indicator. The conclusion We retain the view that the USD is facing continued head winds, labour data is weakening, the economy is slowing to levels that suggest it could be flirting with recession and inflation is back in sight of the 2% handle.

There is also one other piece of information that allows us to retain our bearish view on the USD… Don’t Fight the Fed! – if they want to cut, they will take the USD with it.

Jackson Hole Symposium – When doves try Market pricing of the Federal Funds rate currently sits at 93 basis point of easing by year-end. Let us put that into perspective it was 110 basis points of easing at the peak of excitement, yet despite the increase in yields DXY has sold off and now trades sub-102.00 and is still falling like a stone. Why?

It's not like EUR/USD data from Europe is smashing USD bulls, European PMIs are expected to be around 50.1, a barely expanding outlook. So it's not that. Second point some are highlighting is the rise and rise of Vice President Harris.

The odds of her taking the Oval Office are mounting by the day. On the day it was announced she will be Democrats presumptive nominee her odds of winning according to Predictit.org was 45c now: She is odds on. Which has put her policies front and centre, including her latest announcement of possible increase to the corporate tax rate to as high as 28 percent.

That might explain DXY’s fall. But really it looks to be down to the only event that has mattered all year – when is the Fed going to cut rates? The off again on again nature of where the Fed sits has been down to the surprise rally in inflation in the March quarter and this has led to Board dissent, mis-matching communication and a general rudderless trading in bonds, FX and like as Powell and Co. faffed about.

That appears like its going to end this week as we turn our attention to Wyoming and the annual Jackson Hole Monetary Policy Symposium. Everything is gearing up to a Jerome Powell speech that will finally set the ship on a clearer path. Why do we think this?

Because history shows that Jackson Hole is normally when Fed Central Banks lay out their playbooks for the coming period. For example: In 2010 as the world and the US struggled to break out of the slump created by the Global Financial Crisis then-Fed Chair Ben Bernanke hinted (practically mapped out) the second series of Quantitative Easing, the bond-buying program designed to stimulate growth and maintain price stability. The markets responded fervently to the money taps being opened further, and the bulls that were long made a killing.

Then in 2020 Now-Fed Chair Jerome Powell announced a major shift in Fed policy framework, introducing average inflation targeting rather than the hard and fast figure of the previous generations. This meant the Fed would now be able to tolerate price fluctuations and periods of time where inflation might hold above the traditional 2% target before raising interest rates. This was in response to COVID and having the ability to flex policy due to the unforeseen nature COVID was creating.

In 2024 – will August 23 be another point for the history books? The doves certainly think so. Expectations are he will map out what the board is willing to tolerate around inflation as recent economic data points are a mixed bag which include: An easing Inflation rate, with July’s consumer price index falling below 3 per cent for the first time since 2021 but at 2.8 percent is still well off target and is falling at a slower pace than forecasted.

Consumer spending remains strong despite the first rate rise in the Federal Funds rate taking place over 20 months ago. July’s retail sales report showed a 1 per cent increase, well above expectations. Then there is the labour market, which was the cause of the recent market volatility due to what is known as Sahm’s recession indicator.

US non farm payrolls in the month of July came in at 4.4 percent - this is low by historical standards but it's the speed of change that triggered the Sahms recession indicator. Since 1950 every time the three-month moving average of the unemployment rate has risen by more than 0.5 percent from the previous 12 month low, The US has entered a recession. That's what is so telling for the market and why the doves are really trying to push The US dollar lower.

Powell is clearly facing a race against time in catching the economy and the unemployment rate before the handbrake in higher interest rates, which has been doing its job, stops working and causes the US to skid and crash. With all this as his “data dependent” input, Powell's remarks will be closely watched for further confirmation of an anticipated interest rate cut that is expected in September. As mentioned above the market has 93 basis points come year end.

With only three more meetings before the end of the year – one of the meetings could have a double notch cut associated with it. Will it be September? That is where Jackson hole comes in for the following reasons: A 25-basis-point cut may not be sufficient to prevent the economy from slipping into a recession, as higher rates make it more challenging for businesses to borrow and grow.

A 50-basis-point cut, on the other hand, risks reigniting inflation and sparking another speculative bull run in the markets, as cheaper borrowing costs could lead to increased risk-taking. Jackson Hole gives Powell the ability to test out the market’s appetite and concern, on this last point. If the response to a 50-basis point cut leads to speculative trading, and inflation fears before the September meeting then it will likely take the softer path.

If however the markets suggest this isn’t enough to ‘stop the skid’ then come December the 93 plus basis point cuts forecasted are on. Which brings us to the final point. Is the USD oversold?

In short – no. Yes, bearish beats are growing but looking at the likes of the EUR/USD, AUD/USD, GBP/USD and USD/CAD none of these are screaming oversold. In fact there is clear room for further runs particularly in the first two.

So set your alarm clocks – Jackson Hole is going to provide the playbook for the rest of the FX year.

With core CPI missing expectations and some slight deceleration in other areas such as retail sales an overall service economic activity. The RBA is likely to hold tight and not raise rates on Tuesday. We say this with some confidence, based on the communication coming from RBA governor Bullock.

She had emphasised the importance of the second quarter CPI print at the June meeting, despite providing hawkish rhetoric around the risk of rate rises and a stalling inflation story. This had led the market and many economists to suggest the possibility of a rate rise has now reduced to sub 10% coming into Tuesday's meeting. That clearly means that it's not still a possibility but all things being equal the likelihood now is negligible.

You can see that here in the charts of the Aussie dollar particularly against the JPY and the USD AUDUSD AUDJPY Given the preference for rate stability by the board, what's also interesting about the Q2 CPI figures is that it gives them a clear path to keep rate stability (their words) for the stable future. It suggests not only will August be a hold but suggests that the September meeting as well would likely be the same. However it can't be ignored that CPI was slightly ahead of forecast and thus the Statement of Monetary Policy (SoMP) coming up in a few weeks will be very interesting.

Because we expect forecast changes and are likely to show a slower progress towards target. So first and foremost, forecasts have to narrow to include the higher than expected year on year figure. The forecast for inflation at the May SoMP update didn't include the new Federal government’s $300 energy rebate or the Western Australian and Queensland governments respective energy rebate.

This will significantly lower the financial year 24 inflation rate but will simultaneously raise the financial year 25 forecast by a similar amount. Providing a bit of a catch 22 from the board. There's been upward revisions in consumer spending and are likely to challenge the forecast assumptions used in the May statement of monetary policy that was justifying a lower part of inflation.

All things therefore being considered the hawkish message coming from governor Bullock is likely to persist. Because as this chart shows core inflation and headline inflation in Australia is the highest against all major peers and despite the RBA having a 2 to 3% target band higher than its peers around 2% it is a long long way away from reaching its goal. It should therefore be pointed out that come the Tuesday decision making call “all options” as the RBA like to call it, realistically means a tight hold or a possible rate hike With the right hike being dismissed.

This means that there is a divergence going on between the RBA and the rest of the dovish global environment. You only have to look at what the Bank of England said last week to understand that something like AUDGBP has a neutral central bank with the hawkish bias dovish central bank with dovish action to see the pair likely moving slightly higher in the interim. The same argument could actually be made for the AUDUSD because post the CPI number as we explained last week The US Federal Reserve was due to meet.

And although the board didn't move the Federal Funds rate At the July meeting it is all but confirmed September is the likely start point for the Fed’s right cutting cycle. The US has seen some pretty mixed data over the last six days. Unemployment has ticked up; retail sales ticked down; inflation has moderated and forward looking indicators in consumer confidence and industrial manufacturing have both declined.

Couple this with the US election geopolitical risks and other factors explains the rally that has happened in the pair post the CPI data as seen here: AUDUSD Returning to the outlook for the US and the federal funds rate post the FOMC July meeting. 7 major economists are forecasting not just the September meeting with a rate cut but the remaining three meetings of the year will see cuts from Constitutional Ave. And if we take into consideration the FOMC’s dot plots the cuts will continue early into 2025 most likely at the February, March and May meetings. If this doesn't indeed come to fruition the impact on US indices will clearly be to the upside.

FX is likely to have to ask some serious questions around pricing in pairs such as the EUR, GBP and CAD. Which brings us back to the Aussie dollar The current sell off that we've seen in the currency is based solely on the idea the RBA is on a tight hold, and that selling is probably justified. However with the data that is currently before us it is hard to make a case that isn't bullish for the AUD as it gets left behind in the rate cut environment and dovish outlook the global economy is about to undertake.

Thus post Tuesdays meeting Michele Bullock's press conference will be key to this trade idea because it's likely to show you like she did in June that is going to have to continue on with the hawkish view and jawbone inflation lower.