Powell Stays Hawkish
Jackson Hole came, and Jackson Hole went. In the event, Fed Chairman Jerome Powell’s eagerly anticipated speech delivered more than a modicum of economic mumbo jumbo but few surprises. Having saved up their energies over the last two weeks, the markets were a little non-plussed by the Chairman’s comments, initially buying the greenback and selling stocks before reversing the trend prior to Friday’s close. Yesterday’s price action in an albeit thin market as London was closed can probably be broadly ignored. Noticeably, the US Treasury 10-year bond yields are still hovering around their highest levels since 2007. Chairman Powell used much of his speech to delve into the minutiae of inflation data, but he left no one in any doubt that he and the Fed are committed to getting the headline inflation number back to its target of 2%.
There were some signs hidden away in the FOMC minutes published last week that the Fed would be willing to tweak policy if needed in an emergency, which, if anything, throws some light on the underlying delicacy of the situation as they try and navigate a soft landing for the economy. The other side of the coin is that the Fed will tighten more if the economy merits, and Powell certainly made that clear in his speech. And if there was one takeaway, it was that rates will stay high for much longer than most people anticipate. With governments worldwide having to fund huge deficits as they look to plug the gap in their finances caused by Covid whilst trying to defeat inflation, it’s pretty clear that interest rates are not dropping any time soon in the US, Europe or the UK.
The speech did leave the door open for some doves to take flight as Mr Powell also noted that real-time assessments were a challenge whilst emphasising that rate decisions would be data dependent, which suggests the bar to raising rates may be pretty high. With nearly a whole set of data to be published between now and the next Fed meeting on 20th September, there will be plenty of opportunities for both hawks and doves to argue their case on whether the Fed will continue to move rates higher then. Derivative markets currently favour a move higher in November rather than September, but this week’s data could change this view.
As always, the currency and stock markets will be fixated, rightly or wrongly, on the monthly Non-Farm Payroll data released on Friday. With downward revisions of circa 300,000 to the annual total announced last week, the validity and importance of NFP remain somewhat questionable. Still, as always, the headline figure will no doubt move the markets, even if only in a kneejerk reaction. As I write, a figure of 168,000 is the consensus estimate, which, whilst fun to trade off, is not as important a number as the unemployment level, which is expected to be still hovering around the historically low level of 3.5% a country mile away from a level that would concern the Fed. Indeed, one of the more important takeaways from Wyoming was how closely Powell connects inflation to employment, leading him to say, “Evidence that the tightness in the labor market is no longer easing could also call for a monetary policy response” Before Friday’s NFP, personal income and spending data is released, which is forecast to show that spending continues to grow faster than income, which is draining savings and pressuring credit cards. Also published will be core PCE, which is expected to stay pretty benign at 0.2%, no doubt encouraging thoughts that the Fed is done hiking.
Back across the Atlantic and closer to home, an essential but often overlooked number was published yesterday when the eurozone’s M3 money supply was shown to have continued falling last month. Money supply is dropping worldwide in some cases very rapidly, possibly heralding a period of deflation ahead. Whether we see evidence of this in the Eurozone’s CPI data on Thursday is open to debate. However, analysts seem confident that the headline number will drop below 5% whilst as elsewhere, the core number will stay stubbornly strong. If core is seen to be finally dropping below 5.5% and with a recession seemingly starting in Germany, the chances of another move north in the ECB’s interest rates in September will subside.
As we come to the end of summer and as traders vacate their sun loungers for more prosaic desks, the markets should start to see volatility and volume return and, at last, some direction, so buckle up and remember, never fight the Fed and definitely not its current mantra: of higher, and possibly higherer, for longer.