1. Bank of America believes that the upcoming non-farm payrolls report is unlikely to be the decisive factor in determining whether interest rates will be raised in September; 2. The bank argues that a significantly weak non-farm payrolls report could reduce the likelihood of a rate hike, but the Consumer Price Index (CPI) remains the key indicator for the Federal Reserve's decision on raising rates; 3. The bank maintains its expectation of a rate hike in September.
Cailianshe, September 3 (Editor: Bian Chun): At 8:30 p.m. Beijing time on Friday, the U.S. non-farm payrolls report for August will be released. This is one of the most important economic data releases ahead of the Federal Reserve's mid-September monetary policy meeting.
Given the sharp volatility in the bond market this week, the impact of the next batch of economic data may differ. Bond yields suggest that interest rates may rise and remain elevated, prompting investors to closely monitor the August employment report released on Friday as a new reference point for whether the Federal Reserve might take action at its later this month meeting.
However, Bank of America considers the upcoming non-farm payrolls report merely an "appetizer" before the Federal Reserve's monetary policy meeting scheduled for September 15–16.
The bank's analysts wrote on Wednesday: "Non-farm payrolls data are unlikely to be the decisive factor in determining whether interest rates will be raised in September. A significantly weak non-farm payrolls report could lower the probability of a rate hike, but the Consumer Price Index (CPI) remains the key metric guiding the Federal Reserve's decision on raising rates. We maintain our expectation of a rate hike in September."
The Consumer Price Index (CPI) for August is scheduled for release on September 11, with market expectations pointing to an inflation rate of 3.4%, unchanged from July. However, considering the ongoing pressures stemming from the conflict involving Iran, actual inflation may exceed expectations.
Federal Reserve Chair Kevin Warsh's speech last week at Jackson Hole has further heightened investor focus on the CPI.
Although Warsh acknowledged on Friday that recent inflation data have moderated, he deemed the progress insufficient. He stated that while summer CPI and PCE price data were better than expected, "they did not lead me to believe that there has been a meaningful improvement in the underlying inflation trend."
He added, "We must be confident that underlying inflation is clearly and sufficiently rapidly returning to our target. Otherwise, we still have work to do."
"Unless employment data show a significant unexpected decline, we are skeptical that Friday's non-farm payrolls report will determine the outcome of the September Federal Open Market Committee (FOMC) meeting. At the Jackson Hole conference, Warsh noted that the labor market remains stable, consistent with expectations of full employment, while emphasizing that inflation remains above target levels and warrants close monitoring by the Federal Reserve," said Bank of America analysts.
In light of market anxiety over potential rate hikes, Bank of America pointed out that if employment data are weak and reduce the likelihood of a rate hike, the market will refocus on the Federal Reserve's employment objectives, with reactions expected to be more pronounced than previously observed.
The bank also stated, "Nevertheless, some uncertainty may persist in the market ahead of the release of inflation data, as inflation remains the Federal Reserve's primary concern."
Bank of America reaffirmed its forecast of three Federal Reserve rate hikes earlier this week, arguing that Waller’s speech at Jackson Hole presented a "more credible Federal Reserve" to the market.
"For us, the key takeaway is that Waller has raised the threshold for holding rates steady—he advocates that the Fed should focus on trends rather than 'isolated data points,' and believes underlying inflation has not 'substantially improved,'" said Aditya Bhave, an economist at Bank of America, in a report.
He added, "Unless there is a significant downside surprise, the onus is now on Waller to deliver a rate hike in September. Otherwise, we believe he risks undermining some of the credibility gained last Friday."
Given the signals from the bond market, the upcoming data releases have become even more critical. As global sovereign bond yields climb to multi-year highs, fixed-income investors believe that interest rates remaining elevated for an extended period may become the new normal.
Editor/KOKO