US data – Weak but no crash (yet)
The well anticipated US August payrolls brought in mixed signals for the Federal Reserve. The headline number was not weak, but revisions for July were. The 3-month average now stands at 114k, vs 200k in May. The signs of labor market softness Chair Powell have feared are therefore there. Unemployment was lower than in July, but still 4.2%, and earnings are in slight acceleration, now 0.4% m/m. The Fed will cut interest rates at its September 18th meeting, but Fed officials have chosen not to give a clear indication of the likely size of the cut. Governor Waller gave a speech just before the start of the blackout period, suggesting a larger 50bp cut is on the table but not a given. Market now prices 35bp for the meeting.
ECB – Check the pace
On Thursday, the European Central Bank will cut the deposit rate for the second time this year, from 3.75% to 3.50%. The market focus will be on guidance regarding pace of cuts, and projection will be the tool used to provide guidance. Growth will likely be revised lower after disappointing German data in July and August. Inflation is likely to be revised slightly higher but to remain close to target for the next two years. Overall, the ECB will try not to give dovish guidance and guide for an acceleration of pace, but rather to keep options open and maintain a “data-dependent” approach. After September, December is the most likely meeting for next cut; October is a possibility.
US elections – Back on the radar
On September 10th, the Harris-Trump debate will bring focus back to US elections. Since Biden retired from the US Presidential bid, Trump odds fell nearly 10% on Prediction markets and the election is now 50-50. The fraction of undecided voters is high, hence the upcoming debate could be important. Markets have priced out chances of another Trump mandate, after having traded this theme in the second half of July. Shall the debate be the catalyst for a re-focus on this instance, duration seems the most fragile asset, as a deep cutting cycle is now priced in but tariffs and fiscal are negative for rates. The USD appears also undervalued in this case, as tariff policy is dollar-positive but recent price action has been negative on recession fears.
Algebris Investments’ Global Credit Team
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