What was big in the 1990s, collapsed in the late 2000s but has staged a surprise resurgence after many years of absence? Yep, you guessed it. I’ve succeeded in making the heroic leap from the rock band Oasis and its comeback tour, to interest rates.

It’s not just the music fans that have been going through the back catalogue. Central banks are also digging out their parka jackets and looking back to the 1990s as they face up to the question of how far and fast rates need to fall. And not everyone is reaching the same conclusion.

Half the world away (sorry…) in Jackson Hole, Andrew Bailey, the Governor of the Bank of England, set out three potential paths for “persistent” inflation, all of which would imply very different paths for interest rates over the next couple of years.

First, would inflation simply fall away of its own accord – without any economic damage?

Second, would it take more pain in the jobs market to get inflation consistently back to target?

Or finally, do we now live in a world where pricing behaviour has changed for good and wage bargaining power has increased? That would imply it will be much harder to get inflation down permanently, and rates may barely fall at all.

Listening to Fed Chair Jerome Powell, it sounds like he’s very much in the first camp. Revealingly, he said that he doesn’t welcome any further weakening in the jobs market.

It sounds like he has become much more open to kicking off the easing cycle with a 50 basis-point cut in September, even if some of his colleagues appear less convinced. In practice, as James Knightley explains below, the size of that cut will almost entirely come down next week’s unemployment data.

Over in Europe, policymakers are still making their mind up on which of Bailey’s worlds we now live in. Wage pressure is still too high, but is that simply Europe’s collective bargaining wage process being slow to catch up after a period of higher energy prices? Or does it tell us that workers find it easier to protect their disposable incomes and lock in bigger pay rises than before the pandemic?

Part of the challenge lies in the fact that eurozone unemployment is still at record lows. Of course, that could start to change, and my colleague Peter Vanden Houte points to confidence data, which suggests consumers are slowly becoming more wary about their job security. Formally, at least, the ECB expects wage growth to fall measurably over the next year.

Bailey himself also seems sceptical that we’re in a world where price and wage power has increased permanently. But not all of his colleagues agree, and as long as services inflation stays uncomfortably high, the Bank of England seems set on moving slowly for the time being. That means no cut in September, regardless of what the Fed does, and the recent strength in the pound suggests investors are taking notice.

Any notion of policy divergence, however, I suspect will be short-lived. We reckon rates are headed to a similar destination in most developed economies, and for most, that probably means rates of 3% in the medium term, plus or minus half a percent or so. And as Padhraic Garvey writes, that means the 1990s might be a useful benchmark after all in terms of where US Treasury yields go from here.

If that comes to pass, then the Fed should be pretty chuffed. The 1995 rate-cutting cycle, much like the one in 2019, was a rare example of a central bank nudging rates back to a more neutral level without any major hiccups.

Of course, it’s much more common that rate cuts are started – or accelerated – by the wheels falling off the bus. And the added challenge today is that widespread fixed-rate lending means it takes longer for interest rate cuts to hit the economy. 

Those US jobs figures will give us a clue as to whether we're entering this more precarious scenario. And if we are, then there’s a real risk central banks have left it too late to start cutting rates.

If they have? Well Oasis might say they needn’t look back in anger, economic recoveries don’t live forever. And hey, at least we’ve got someone other than Taylor Swift to blame for poor inflation forecasts next summer.  

Chart of the week: Markets are reassessing how far rates need to fall

Source: Macrobond, ING

THINK Ahead in developed markets

United States (James Knightley)

•Fed Chair Jerome Powell made it clear at the Jackson Hole conference that the Federal Reserve will cut interest rates on September 18, stating that "the time has come for policy to adjust. The direction of travel is clear.” The question is whether it will be a 25bp move or a 50bp cut. The market is favouring 25bp.

•Our most recent forecast update round coincided with the market volatility at the beginning of August, and we changed our three 25bp rate cut call for this year to one whereby the Fed could cut by 50bp in September before reverting back to 25bp moves in November and December with the policy rate reaching 3.5% by summer 2025. The perhaps looks a little aggressive now, but the coming week will be critical in determining how aggressive the Fed will be on September 18.

•The jobs report is the clear focus after recent weakness and downward revisions to payrolls. If we get a sub 100k on payrolls and the unemployment rate ticks up to 4.4% or even 4.5% then 50bp looks likely given Powell’s comment that “we don’t seek or welcome further cooling in labour market conditions”. However, if payrolls come in around the 150k mark and the unemployment rate stays at 4.3% or dips to 4.2%, we can safely say it will be a 25bp. We are forecasting something in between for both, which will make the 25bp or 50bp call a difficult one. We will also get the ISM reports for the manufacturing and services sectors, plus other job market indicators that will help us firm up expectations for the jobs report.

Bitcoin neared monthly lows on Sept. 4 as crypto markets continued to react to a United States tech stock rout.

BTC/USD 4-hour chart. Source: TradingView

Gold, which just weeks ago set a new all-time high above $2,500, shed up to 1.3% on Sept. 3.

XAU/USD 4-hour chart. Source: TradingView

“Watching for a potential bounce around this area. And if lost, we'll fill the daily wick at $51.5k.”

BTC/USDT chart (screenshot). Source: CrypNuevo/X

“Sweep + potential 12h bullish divergence forming for Bitcoin, as it tests the support level again,” he told X followers on the day alongside a chart showing relative strength index (RSI) readings.

BTC/USDT 12-hour chart with RSI data. Source: Jelle/X

“Nice wipe on OI here but no immediate signs of buyers stepping in just yet.”

BTC/USD 4-hour chart. Source: Credible Crypto/X

Data from monitoring resource CoinGlass meanwhile recorded total crypto long liquidations of $200 million for the 24 hours to the time of writing.

Crypto liquidations (screenshot). Source: CoinGlass

Source: Cointelegraph

At 2.47% month-on-month, consumer price inflation in Turkey was slightly above the median of analysts' expectations (2.29%). Under normal circumstances, comments on yesterday's publication by TurkStat would be deployed in a similar way. However, nothing about inflation in Turkey is normal, Commerzbank’s Head of FX and Commodity Research Ulrich Leuchtmann notes.

Lira continues to depreciate significantly in nominal terms

“With such high inflation, measuring it is particularly difficult. Reporting the rate to two decimal places is therefore nonsensical. The official figures enjoy little public trust. The only problem is that when TurkStat reports lower inflation rates than in the past, nobody believes it, and lower figures do not change price-setting behavior. A dynamic of falling inflation is impeded.”

“On the other hand: assuming that inflation is measured reasonably correctly, previous month's rates of around 2½% imply that monetary policy (with a key rate of 50%) is now clearly restrictive. So, it's actually time for the first interest rate cuts. But this phase is particularly tricky. After the Lira crisis of 2018, the central bank had cut its key interest rate far too quickly and far too aggressively, sowing the seeds for the next, even bigger wave of inflation and depreciation.”

“This is far from forgotten. Not by currency traders and not by those who set prices in Turkey. Therefore, the danger zone has not been left behind. Anyone who expects more from the Lira under these circumstances than a devaluation that understates price developments, anyone who wonders, for example, why the Lira continues to depreciate significantly in nominal terms, is much, much too optimistic.”

Source: FXSTREET

The AUD/USD pair bounces back and recovers its intraday losses after posting a fresh two-week low slightly below the crucial support of 0.6700 in Wednesday’s European session. The Aussie asset rebounds as the US Dollar (USD) corrects moderately after posting a fresh two-week high. The US Dollar Index (DXY), which tracks the Greenback’s value against six major currencies, falls from recent highs of 102.00 to near 101.60.

Market sentiment remains risk-averse as investors are cautious ahead of the United States (US) Nonfarm Payrolls (NFP) data for August, which will be published on Friday. S&P 500 futures extend its Tuesday’s downside further, exhibiting a decline in investors’ risk-appetite.

Investors keenly await the US labor market data as it will shape the Federal Reserve’s (Fed) interest rate cut path for the September meeting. The significance of the labor market has increased as the commentary from Fed Chair Jerome Powell at the Jackson Hole (JH) Symposium signalled that the central bank is focused on preventing job losses, given that price pressures are on track to return sustainably to bank’s target of 2%.

Before that, the US Dollar will be guided by the JOLTS Job Openings data for July, which will be published at 14:00 GMT. Economists expect that US employers posted 8.1 million fresh job vacancies, marginally lower from 8.184 million in June.

On the Aussie front, the Australian Dollar (AUD) recovers losses driven by mixed Q2 Gross Domestic Product (GDP) data. The report showed that the economy expanded steadily by 0.2%, slower than estimate of 0.3%. Annualized GDP grew in line with expectations of 1%, slower than the former reading of 1.3%, upwardly revised from 1.1%.

Going forward, investors will focus on the Reserve Bank of Australia (RBA) Governor Michele Bullock’s speech on Thursday. Investors will look for fresh cues about whether the RBA will pivot to policy normalization this year.

Source: FXSTREET