Rebounding risk sentiment argues against aggressive Fed rate cuts: Deutsche Bank

Federal Reserve Chair Jerome Powell will give a speech at the Jackson Hole symposium on Friday, with investors awaiting clues about the monetary policy path going forward.

Although the upcoming September meeting could bring either a 25bp or a 50bp cut, the recent recovery in risk sentiment would “argue against more aggressive action,” said Deutsche Bank economists in a Monday note.

The economists point to a recovery in equities as a significant driver of this risk sentiment rebound, noting that since the market's recent tightest point on August 5, equities have rallied by nearly 7%.

The surge has helped more than offset the tightening in financial conditions that followed the weaker-than-expected July jobs report. The bank's high-frequency version of the Fed's financial conditions index (FCI-G) now indicates an overall easing of conditions, with the baseline three-year lookback version showing its first outright ease since June 2022.

The broader recovery in financial conditions is not limited to equities alone. Deutsche Bank highlights additional factors contributing to the easing, including a 30 basis point decline in mortgage and corporate credit rates, a 40 basis point increase in house prices, and a 1% depreciation in the dollar. These movements collectively suggest a more favorable economic environment than what was observed just a few weeks ago.

The upcoming Jackson Hole symposium is seen as a key event for assessing the Fed's near-term policy direction, with significant implications for market sentiment and the global economic outlook.

While the academic discussions at the symposium could influence long-term policy trends, the side interviews are expected to provide more insight into immediate policy questions.

It's important to note, however, that this conference is just one of many held throughout the year, and doesn't carry any additional significance in this context.

Source: Investing.com