Jackson Hole – September cut cemented
At the annual monetary policy conference in Jackson Hole, Fed Chairman Jerome Powell shifted dovish. In his prepared opening remarks, Powell stressed that risks to the Fed mandate are now more tilted toward employment and given the degree of restrictiveness an adjustment may be warranted. The comment reads as guidance for a September cut. August labour market data are still to be published ahead of the September 17th policy decision, but the deep revisions that accompanied the July report pushed the central banker to commit to a cut. Comments on inflation were also more dovish, as the tariff impact is qualified as more temporary than it was in July. We expect the Fed to cut two times this year. 2026 will be very uncertain due to the Chairman change in May. US rates now price terminal rate at 3%, in line with its neutral level.
Ukraine war – Fading hopes
In August, hopes for a resolution of Ukraine war increased as President Trump and President Putin met. The meeting was followed by leaked openings by President Zelensky on territorial concessions, and US sources floated the idea of American security guarantees. Subsequent commentary from the Kremlin re-shaped market hopes, as Russia does not seem in a rush to finalise a deal and secondary sanctions promises from the US government for now have not been maintained. We do not envision a quick conflict resolution as Russia does not have incentives to settle quickly. However, with gas supply in Europe back at full levels post 2023 and tight valuations in European credit and equities, we see a resolution as diminishing long term risks but not as an immediate market mover.
Algebris Investments’ Global Credit Team
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