The market is preparing for the main event of the week: Powell’s speech at the Jackson Hole symposium. A rate cut for the September meeting is almost a certainty now, so it’s no longer news. Statements from some Federal Reserve members and the FOMC minutes from before the latest jobs report already indicated that the Fed is likely to implement a rate cut at the next meeting. The focus now shifts to how aggressive the rate cut path will be. Three factors will be crucial: inflation, the job market, and economic growth.
Inflation is falling, and Fed members have expressed increasing confidence that inflation will reach the 2% target. As the economy cools, the upside risks are diminishing, though not entirely disappearing. The job market has also been cooling. The last few jobs reports showed rising unemployment and smaller payroll gains. The rise in unemployment may have come a bit too quickly, triggering the Sahm Rule, which has heightened recession fears. As a result, jobs data will be under close scrutiny moving forward. The latest BLS report, suggesting that payroll data might be overestimated by more than 800k, has only fueled recession concerns.
Regarding economic growth, the U.S. has been growing steadily for some time, but the latest PMI and ISM numbers clearly indicate a slowing economy. The latest FOMC minutes confirmed this, noting that Fed staff had made downward revisions to GDP for the second half of the year.
All of this data confirms that rate cuts are on the horizon. The next jobs reports will likely determine how fast the Fed will act. Today, Powell will probably state that the high rates are having the desired effect, the job market is becoming more balanced, confidence in inflation moving toward the target has increased, and that the Fed will cut rates soon. Discussions about the neutral rate, recession fears, and whether a 25 or 50 basis point cut will occur will influence the market’s reaction today. I don’t think Powell will openly suggest a 50-point move, but the key will be whether he leaves the door open for such a move at the September meeting. If the possibility of a 50-point cut remains, Powell might also try to calm recession fears, as markets may wonder why the Fed would accelerate rate cuts if there is no significant recession risk.
(E-Mini S&P 500 Daily Chart)
The S&P 500 fell at the end of July, with the second phase of the downward move driven by possible recession panic triggered by the Sahm rule. However, dip buyers once again stepped in, lifting the index rapidly. Now, the index is back within its upward trend channel, attempting to hold onto the recent sharp gains. This week’s close will be important. The lower line of the channel is at 5570, and it’s crucial that the S&P closes within this channel for the coming weeks. If it does, the next potential resistance levels are around 5720, followed by 5870 and 6100. However, if the index fails to stay within the channel, the 100-day moving average and the recent bottom may provide support, with levels to watch at 5375 and 5150.
The Spearman indicator usually shows trends by staying above the 70-80 levels over extended periods of time. In the past 3 or 4 instances, when the S&P 500 experienced a minor correction and then recovered, and the Spearman indicator regained high levels, gains extended for more than a month. A similar structure can be seen today, with the only difference being that this correction and the subsequent counter move were much stronger. The indicator currently in favor of S&P 500 holding inside the trend channel and continue upward move by passing the previous top, so far.
