Preview of the Jackson Hole Symposium: A Closer Look at the Chances of a Rate Cut

In the Ever-Changing Financial Markets, We Stand Like Sages on Mountain Peaks, Overlooking Economic FluctuationsAs key data points such as non-farm employment and retail sales are unveiled, the market's attention has shifted to the upcoming Jackson Hole Central Bank Symposium. Investors are eager to glean insights into the pulse of the U.S. economy and the future direction of monetary policy from Jerome Powell's remarks.

Amidst the complex economic phenomena, we need to focus on one core question: What is the true state of the U.S. economy?

Taking a broad view, the U.S. economy, driven by both the services and manufacturing sectors, has demonstrated resilient growth. The services sector is booming like oil on a roaring fire, while the manufacturing sector, despite facing high interest rates and inventory adjustments, is mainly impacted on the production side. Durable goods consumption, particularly in the automotive market, remains robust. Overall, the U.S. economy is trending towards a "soft landing."

From a broader perspective on retail consumption, the U.S. consumer market has shown remarkable resilience. Retail data for July exceeded expectations across multiple metrics, indicating sustained growth in consumption. For example, hotel occupancy rates are on par with the past two years, and the airline industry has seen increases in both revenue and passenger numbers year-over-year.

The contrast between hot consumption and slowing inflation is striking. American consumers are pursuing value for money without cutting back on spending. The continuous growth of household wealth is the biggest support for consumption, with the stock market and real estate market being the two main pillars of this wealth growth.

Source: U.S. Census Bureau

The Labor Market Shows No Signs of Slowing Down. Unemployment claims have come in below expectations for two consecutive weeks, and job vacancies stopped declining after July. Wage growth also appears to be bottoming out, reflecting healthy hiring demand from businesses. The influx of undocumented immigrants has increased the labor supply, which has somewhat weakened the predictive power of Say's Law based on demand-side factors.

The robust financial health of businesses is the cornerstone of strong hiring demand. Since 2021, net interest expenses have not significantly increased; in fact, they have decreased, marking a clear departure from previous economic cycles. Cash-rich companies have adopted a strategy of borrowing long-term and saving short-term during periods of inverted interest rates, benefiting from high short-term rates. This has also led to a significant improvement in corporate gross margins.

Source: International Monetary Fund

Inflation Data Shows Some Distortions. Rising housing prices and falling used car prices have become the main factors influencing inflation. The year-over-year growth rate of core goods is at a historic low, contrasting sharply with the rebound in the Producer Price Index (PPI). It is expected that this divergence will eventually align, as significant deflation in goods prices is unsustainable.

Given the Federal Reserve's "dual mandate," there is currently no urgent need to cut interest rates. The strong performance of consumption indicates that the Fed is not lagging behind the economic curve. Therefore, the market's expectations for Fed rate cuts and a downward inflation trend may be overly optimistic. For the upcoming Jackson Hole Symposium, it is advisable to remain cautious and not to expect overly dovish signals.