Core Viewpoint - Recent US economic data exceeded expectations, initially reducing the likelihood of a rate cut in September, but Powell's dovish remarks at the Jackson Hole meeting paved the way for a potential cut [3][5]. Economic Data and Market Reaction - The Jackson Hole meeting dominated market sentiment, with US stocks rebounding after a four-day decline. The 10-year Treasury yield fell below 4.3% as a result of Powell's comments [4]. - For the week of August 18 to August 22, the 10-year Treasury yield rose by 5.4 basis points to 4.262%, while the 2-year yield decreased by 4.4 basis points to 3.707%. The US dollar index fell by 0.14% to 97.72 [4]. Jackson Hole Meeting Insights - Powell's speech indicated a shift in monetary policy stance, suggesting a lower threshold for a September rate cut. He noted that inflation risks have diminished, while unemployment has risen significantly [5]. - Employment growth has slowed, with an average of only 35,000 non-farm jobs added over the past three months, far below the monthly target of 168,000 for 2024 [5]. Monetary Policy Framework Adjustments - The Federal Reserve announced revisions to its monetary policy framework, moving away from the average inflation targeting (AIT) to a more flexible 2% inflation target. This change reflects the current high inflation environment [6]. - The focus on employment shortfalls has been removed, but the Fed will still monitor employment levels closely [6]. Strategic Implications - In an optimistic scenario, the expectation is for rate cuts in September and December, with an overall reduction of no more than 50 basis points for the year. The market currently prices in about 2.2 rate cuts for the year, which may be overly optimistic [7]. - Following the September FOMC meeting, the market is likely to increase bets on rate cuts in 2026, which could lead to a downward trend in the 2-year Treasury yield and the US dollar index [7].

Global Macro - The report highlights that the Federal Reserve is likely to open the door for a rate cut in September, driven by the increasing risks in the employment market outweighing inflation risks [2][3] - The adjustment in monetary policy framework from an average inflation targeting (AIT) to a flexible 2% inflation target reflects the changing economic environment, indicating a shift in response to high inflation and growth conditions [4] - The report suggests that while a rate cut in September is probable, it is more of a preventive measure rather than a signal of an impending recession, as the U.S. economy shows resilience [4][3] Employment and Inflation - The employment market is facing downward risks, with July's non-farm payroll data falling short of expectations and previous months' data being significantly revised downwards, indicating potential overestimation of current employment figures [2][3] - Inflation risks are considered manageable in the short term, with the impact of tariffs expected to be gradual rather than immediate, thus supporting the case for a rate cut [3] - The labor market's downward pressure, influenced by tightening immigration policies, may also help to suppress inflation, further justifying the anticipated rate cut [3] Economic Indicators - The report notes that key economic indicators such as retail and industrial production suggest that the U.S. economy remains robust, with a low likelihood of a recession in the near term [4][26] - The labor participation rate is declining, which may lead to a higher actual unemployment rate than currently reported, complicating the Federal Reserve's data-dependent policy approach [10][12] - The financial conditions in the U.S. are currently easing, which may support continued economic growth and limit the need for aggressive rate cuts [15][18]