Week Ahead: US data could alter Fed rate hike odds

Traders are expected to keep analyzing Fed Chair Powell's major speech from last Friday at the Jackson Hole central bank assembly as the week begins. Powell recognized that the current monetary policy is “restrictive” and assured that officials will be cautious while analyzing whether to further increase the rates. It is anticipated that the September FOMC meeting will pause any adjustments, however, robust growth could potentially warrant some mild tightening.

Markets predict a 50-50 chance of a final hike by November. Odds have been yo-yoing through the summer for the September meeting in a few weeks‘ time but a 25bp hike on the 20th is only given a 20% chance. Last week’s nuanced approach by Powell saw the dollar print a sixth straight week of gains though it closed off its highs on Friday. Stocks still look jittery even though they halted three weeks of consecutive losses.

Of course, data is now key, and it doesnt get much bigger than US non-farm payrolls released on Friday. The consensus predicts a further cooling in employment growth with job gains of 170k in August, moderating from the 187k jobs added in July. The unemployment rate is forecast to remain close to multi-decade lows at 3.5%. We note the latest S&P global PMI survey did raise a few alarm bells about hiring conditions. The Fed pays close attention to changes in average hourly earnings so another print at 0.4% m/m or above would likely be a hawkish signal for markets. Core PCE inflation data released the day before NFP will also be in focus though a relatively benign 0.2% m/m is forecast.

The eurozone releases all-important inflation data with the headline rate expected to dip from 5.3% to 5.1% y/y, while core CPI that strips out food, energy, alcohol and tobacco prices is forecast to ease from 5.5% to 5.3% y/y. Base effects will likely cause a drop in the headline figure. ECB policymakers will pay more attention to the core print which remained stubbornly high in July and may stay elevated due to the effects of government subsidies. These August numbers will be a key input into next months rate decision with a recent media story quoting ECB sources stating that momentum was growing for a rate pause. The euro has suffered in recent weeks with its underlying bear trend fairly entrenched. The 200-day simple moving average is a key focus and pivot point around 1.08.

Eventually, the awaited information about the effects of China's progressively-fed stimulus on the economy could be unveiled this week. This can potentially occur when China discloses its purchasing managers indexes (PMIs) for industries such as manufacturing and non-manufacturing for the month of August. This will be followed by the announcement of the Caixin manufacturing PMI on Friday. The Australian dollar, extensively considered as an indicator of risks related to China, has been under significant pressure following continuous disappointing Chinese economic data. The Australian dollar eagerly anticipates improved data which will help to maintain the AUD/USD above the 0.64 level.