Looking ahead to the rest of 2024, a jumbo cut should be your base case. The data since July has been increasingly pointing to this outcome. The latest payroll revision, which suggests that the once-robust U.S. job market is cooling faster than anticipated, was the cherry on top—it’s as if the data has been begging for a significant cut all along; we just needed someone to crank up the volume.In yesterday’s note, I asked, “Does Chair Powell have the backbone to go big with preemptive rate cuts to dodge a downturn?” Well, the answer is an unequivocal yes. But now, the real question is: Is it too late?The slow creep in unemployment isn’t something you can brush aside. It’s like pretending that a small leak on your boat won’t eventually send you to the bottom of the sea—things will inevitably get messy. When the labour market starts to wobble, it’s not just a stumble; it quickly morphs into a runaway train, gathering speed until it derails into a full-blown recession. That’s the classic script of US recessions—the jobs market doesn’t just trip; it plummets off a cliff in a spectacular Wile E. Coyote moment.FOREXThe dollar plunged on Bloomberg’s gauge, dropping over 1% as we headed into the weekend. That’s a hefty move, driving the index to a year-to-date low.Jerome Powell’s keynote at Jackson Hole was as dovish as they come—he didn’t just drop hints; he practically handed out roadmaps. Any attempt to spin it otherwise would be a stretch, and if you were thinking of reading between the lines, the dollar’s nose dive should clear things up. It shouted Powell’s message from the rooftops: the Fed is gearing up to go low.Like most FX traders, we weren’t set up for this move. In fact, we were banking on a more neutral Powell to sell the dollar at a better level, but I reflexively hit the sell dollar button—and our sub-145 knock-in orders got triggered, too (those out-of-the-park orders we always recommend leaving).Remember that a first-order rule gets drilled into FX traders on the interbank desk: never fade a central bank surprise for the first 48 hours. If it weren’t Friday, I’d have left the entire position open, but taking half off the table is never a bad idea—especially when you’re already having a stellar month in FX.Here’s the thing: I believe the market was under-positioned on the short dollar trade, which is part of the reason we saw such a big move. But when you look at gold, where positioning is more bullish (i.e., dollar negative), it didn’t react as dramatically compared to the dollar sell-off. This leads me to think we’ll see better opportunities to sell the dollar as newly minted shorts get cold feet ahead of the September 6 NFP. So, while it was a solid play today, plenty of games remain to be played . Fingers crossed, we won’t be kicking ourselves later, gazing wistfully at 146 on USD/JPY or 1.1100 on EUR/USD, wishing we’d had the foresight to load up more.As for moving targets, I am looking at 137 USDJPY, down from 140, and 1.1400 EURUSD, up from 1.1200.OIL MARKETSAfter a steep mid-week drop in oil prices, we’ve seen a solid short-covering rally fueled by hopes that the world feels friendlier when the dollar’s on the back foot. In other words, risk sentiment tends to perk up when the greenback is down and oil prices are lower in local currency.Crude oil prices are hitting another rough patch, with WTI hovering around the $75/bbl mark after rebounding from the early-August market turmoil. With Middle East tensions easing, the focus has shifted to the growing uncertainties surrounding global oil supply and demand. The outlook for global demand is looking increasingly grim, as highlighted by the International Energy Agency’s (IEA) August Oil Market Report. The IEA maintained its forecast for global oil demand to increase by slightly less than 1.0 mb/d in both 2024 and 2025—a downgrade from April’s more optimistic projections of 1.2 mb/d and 1.1 mb/d, respectively. The commentary accompanying the report suggests the risks are leaning to the downside.China, the world’s second-largest oil consumer and the biggest driver of global demand growth, saw oil demand contract for the third consecutive month in June—preliminary trade data for July signals further weakness. The rapid rise of electric vehicles, which now account for over 50% of new car sales in China, raises concerns that the country might hit peak oil demand much sooner than expected.On the flip side, strong demand from American drivers has provided a cushion against China’s decline, but this could be a short-lived reprieve with the summer driving season wrapping up soon.This softer global demand outlook is not what OPEC+ had in mind for 2024. The group faces a tricky balancing act as it considers rolling back production cuts, including phasing out an additional 2.2 mb/d of voluntary cuts in the fall. OPEC+ has been more optimistic about global demand than the IEA. Still, the longer it delays clarifying its production strategy, the more nervous the market could become about rising global supply risks. This uncertainty might just keep the pressure on crude prices in the near term.NUTS & BOLTSMarket participants eagerly awaited Chair Powell’s speech at the Kansas City Fed’s Jackson Hole Economic Policy Symposium this week, hoping for insights into the timing and magnitude of the anticipated rate cuts. Powell’s modestly titled “Review and Outlook” speech didn’t disappoint. He all but confirmed the start of rate cuts next month. “The time has come for policy to adjust. The direction of travel is clear, and the timing and pace of rate cuts will depend on incoming data, the evolving outlook, and the balance of risks,” Powell stated, leaving little to the imagination.With inflation “increasingly appearing” on a sustainable path to the 2% objective, it’s clear what’s now at the top of the Fed’s worry list. Powell emphasized, “We will do everything we can to support a strong labor market as we make further progress toward price stability… The current level of our policy rate gives us ample room to respond to any risks we may face, including the risk of unwelcome further weakening in labour market conditions.” In other words, labour market data just got a VIP pass to center stage.This speech comes hot on the heels of the release of the Minutes from the July 30-31 FOMC meeting, which revealed that the Fed was closer to cutting rates last month than many initially thought. The Minutes highlighted that “several” participants were ready to support a 25-basis-point cut or could have been swayed to do so, and a “vast majority” believed that if the data continued to meet expectations, easing would be appropriate at the next meeting.In light of recent economic data—a slight uptick in the jobless rate and a continued easing in short-term inflation trends—Powell’s speech made it clear that the Fed is now firmly on the path to rate cuts. The debate is no longer about whether the Fed will cut rates but rather about the timing and size of those cuts.While the upcoming employment report on September 6 and the CPI report on September 11 still have the power to influence the Fed’s decisions, it seems that the easing thresholds have already been crossed. The data might dissuade the Fed from cutting at a specific meeting or influence the magnitude of the cut, but the general direction is set.My outlook holds steady: I anticipate 100 basis points of rate cuts in 2024, starting on September 18, with an even 50:50 shot at a 50 bp move. Currently, markets are pricing in a 34.5% chance of a 50 bp cut by the end of the September meeting, up from just 24% the day before, according to the CME’s FedWatch Tool. This tells you there’s plenty of room for the dollar to take a further dive, especially if the upcoming NFP report disappoints. Keep your eyes peeled—things could get interesting.
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