Week ending 26th August 2022.

Until today, global equity markets were having a lacklustre and directionless week as all eyes were fixed firmly on the annual Economic Policy Symposium in Jackson Hole, given Jay Powell, the Fed chair, was speaking at 3pm UK time today (26 August 2022).

In fact, the market was so focused on Jay Powell’s speech, it ignored much of the week’s economic data releases.  For example, sales of new US homes fell in July to the slowest pace since January 2016, thanks to higher interest rates, while US durable goods orders were unchanged on the month, considerably weaker than both last month’s 2.2% increase and the 0.8% increase economists had expected.

Markets even ignored today’s PCE readings which clearly showed that US inflation is slowing!  The PCE Core Deflator is the Fed’s preferred inflation measure, and not only did this decelerate to 4.6% in July, from 4.8% in June, but the month-on-month headline price inflation came in at -0.1%, which is its first negative reading since April 2020 (when the US economy was hit by coronavirus lockdowns and massive job losses).

The message from this data seems very clear to us:  the Fed needs to pivot away from its all-out war on inflation to a more gentle approach otherwise there is a risk that the Fed (along with other central banks, such as the BoE and ECB) may overtighten monetary conditions by increasing interest rates too far and too fast.

In fact, in any normal week this data would have moved markets – but not this week as the Fed chair’s speech outweighed everything else.

And in summary, the message from Jay Powell was that inflation was the Fed’s main concern and while the size of future interest rate increases would be dependent on economic data, he emphasised that policymakers will continue to increase interest rates and cautioned against prematurely expecting any policy pivot as he thinks interest rates need to remain high for ‘some time’.

Unsurprisingly, these hawkish comments disappointed financial markets and equity markets ended today (and as a consequence, the week) lower, with expectations of at least another 0.75% increase in US interest rates at their next policy meeting on 21 September 2022.

Whilst disappointing, it is best to look through Jay Powell’s rhetoric as it is interest rate action, not interest rate talk that actually matters now – and with both inflation and economic growth slowing, significantly higher interest rates for a significant time may not actually materialise, especially when you consider how inaccurate Jay Powell’s previous outlook statements at Jackson Hole have turned-out.

Looking ahead to this coming week, we have US ISM; US employment data (non-farm payrolls; unemployment rate; participation rate; and average earnings); US factory orders; Eurozone CPI inflation; Chinese PMI; and Japanese industrial production.

Investment Management Team

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