Author: Luke, Mars Finance

Last week, the dust settled from the Jackson Hole annual meeting, and Federal Reserve Chairman Powell's speech cleared the fog for the market, pointing the way forward. Contrary to the initial "neutral" interpretation after the meeting, the market, upon deeper analysis, generally adopted a more explicit dovish stance. As noted in a research report by CITIC Securities, Powell's remarks aligned with expectations, emphasizing the downside risks in the labor market and reiterating the view that "tariff-induced inflation is transitory," effectively paving the way for the anticipated rate cut in September.

With the Federal Reserve abandoning the average inflation targeting framework and returning to a more flexible inflation targeting approach that emphasizes "two-sided" employment risks, there has been a subtle shift in policy focus. Therefore, last week was about "listening to the Federal Reserve," while this week, the market's main theme will be seeking and validating the "stepping stones" for the upcoming rate cuts. Every piece of economic data released will be weighed on the scale of "does it support a rate cut in September?"

Key Focus One: Friday's "Ultimate Confirmation" — Will the inflation data signal a green light for a rate cut?

• Friday at 20:30 Beijing Time: U.S. Core Personal Consumption Expenditures (PCE) Price Index for July

With the market having established rate cut expectations, the PCE, the Federal Reserve's preferred inflation indicator, shifts its role from "deciding whether to raise rates" to "confirming whether a rate cut is possible." Its importance will not diminish but rather increase, becoming the first and most crucial litmus test for validating Powell's dovish stance.

• What is the market expecting? The market will eagerly anticipate a moderate or even below-expectation core PCE data. Such a result would perfectly corroborate Powell's assertion that "inflation pressures are temporary," thereby solidifying expectations for a rate cut in September and injecting strong upward momentum into risk assets.

• Unexpected Risks: If the data unexpectedly comes in hot, it will directly conflict with Powell's dovish groundwork, raising market concerns about "whether the Federal Reserve is overly optimistic." This could severely undermine expectations for a rate cut in September and potentially lead to a sharp market correction, as the current optimistic sentiment would be forced to adjust.

Key Focus Two: Wednesday and Thursday's "Economic Checkup" — Seeking "downside risks" in the labor market

Powell emphasized his concern about the "two-sided" risks in the labor market, marking a shift in the Federal Reserve's policy goal towards "protecting employment." Therefore, this week's economic data, particularly employment-related indicators, will be the market's focal point.

• Wednesday at 20:30 Beijing Time: U.S. Second Quarter Real GDP Revision

• Thursday at 20:30 Beijing Time: U.S. Initial Jobless Claims for the Week

Unlike before, the market's interpretation of these data points will undergo a 180-degree shift:

• "Bad news" is "good news": Any signs of economic slowdown, such as a downward revision in GDP growth or an unexpected rise in initial jobless claims, will be interpreted by the market as "good news" supporting a Federal Reserve rate cut. These data will directly confirm Powell's concerns about "downside risks," thereby reinforcing the urgency for a rate cut.

• Challenges from Strong Data: Conversely, if the data remains robust, indicating a still-hot labor market and strong economic resilience, this will become a major obstacle on the path to a September rate cut, potentially shaking the market's confidence in CITIC Securities' prediction of "three consecutive rate cuts within the year."

Other Signals Worth Noting

• Thursday at 09:30 Beijing Time: China's Official Manufacturing and Non-Manufacturing PMI

• Thursday at 17:00 Beijing Time: Eurozone August CPI Year-on-Year Preliminary Value

Against the backdrop of potential divergence in major global central bank policies, data from China and the Eurozone will provide important macroeconomic references. Particularly, the European Central Bank's stance will be crucial; if Eurozone inflation data also shows signs of cooling, it will increase the likelihood of a coordinated shift towards easing among global central banks.

Summary and Outlook for This Week

In summary, the Jackson Hole annual meeting has set a new trading script for the market: anticipating and trading the Federal Reserve's rate cut cycle. This week is no longer about a confused exploration of policy direction but rather a journey to validate the path of rate cuts. Market sentiment has tilted towards optimism, but whether this optimism can be sustained entirely depends on whether the upcoming macro data can provide sufficient support.

Investors need to closely monitor the deviations between data and expectations. In the current narrative, moderate inflation and weakening employment data are the combinations the market most hopes to see. Powell has already issued the "exam paper," and this week's data will be the "answers," directly determining whether the market continues to speed down the fast lane of rate cuts or encounters bumps and doubts.

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