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29 August 2022
- Fighting inflation is more important than the risk of an economic slowdown. At least that is the short answer to the comments made by the Fed chief Jerome Powell and several ECB officials at the Jackson Hole symposium.
The US central bank head surprised the markets with his most hawkish speech ever. Jerome Powell was quite clear that the Fed will raise rates to the level needed to reduce growth and keep them there until inflation falls to at least three times the Fed’s 2% target. - “Reducing inflation is likely to require a sustained period of below-trend growth. While higher interest rates, slower growth, and softer labour market conditions will bring down inflation, they will also bring some pain to households and businesses. These are the unfortunate costs of reducing inflation. But a failure to restore price stability would mean far greater pain,” Powell said on Friday.
- Powell did not specify how far rates could rise, but his message was quite strong. And even though some economists think that with unemployment growing rapidly, the Fed will eventually back off and may eventually cut rates next year, the financial markets took his speech quite seriously. As for the near-term decision, Powell reiterated that the decision on the size of the next rate hike would depend on current data.
- Speaking at Jackson Hole on Saturday, ECB board member Isabel Schnabel, French Central Bank chief François Villeroy de Galhau and Latvian central bank Governor Mārtiņš Kazāks all argued for forceful or significant policy action to address uncomfortably high inflation. Klaas Knot, Netherlands’ Central Bank president and one of the more hawkish members of the ECB’s board, also joined them. “Europe’s inflation problem is so large at this moment that I think it’s our duty to raise rates every six weeks until the moment that inflation stabilizes,” Knot said.
Indices
Just two days completing the entire week were enough for US stocks to record one of the worst weeks this year. Stocks rose after Monday’s plunge, but Jerome Powell’s speech on Friday spelt disaster for stocks. The DJIA lost over 1,000 points, and the S&P 500 and Nasdaq wrote off over 3%, erasing August’s gains and losing over 4% for the week.
Similar to the US, European stocks lost most of their ground on Friday as inflation in Europe is also a problem that the ECB, or some of its officials, want to address by raising rates by up to 0.75%. Pan-European STOXX Europe 600 Index ended the week 2.58% lower, Germany’s DAX 40 tumbled by 4.23%, France’s CAC 40 declined by 3.41%, and the UK’s FTSE 100 lost 1.63%.
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US30 -4.22% |
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US100 -4.82% |
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US500 -4.04% |
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GER40 -4.23% |
Commodities
Oil prices strengthened during the week, mainly due to the speculation that the United Arab Emirates had agreed with Saudi Arabia, which on Monday hinted about a possibility of reducing oil production if more crude from Iran reaches the market should Tehran strike a nuclear deal with the West. “The impression remains that Saudi Arabia is not willing to tolerate any price slide below $90. Speculators could view this as an invitation to bet on further price rises without the need to fear any more pronounced price declines,” Commerzbank said in a note. The price of oil was not hurt by a temporary drop in price after Fed chief Jerome Powell’s speech at Jackson Hole.
On the other hand, the price of gold was rather negatively affected by Powell’s speech. The price of the precious metal has thus been below the level of USD 1,800 per ounce since July and is currently approaching the support level of around USD 1,670 again, which was first formed in mid-2020.
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Gold -0.60% |
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Silver -0.80% |
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BRENT +4.16% |
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NATGAS +0.04% |
Forex
The euro rebounded from below parity lows during the day on Friday after more speculation about a possible 0.75% rate hike at the next ECB meeting, as well as lower than expected Core PCE Price Index numbers in the USA.
However, following Jerome Powell’s speech, the European currency has once again returned below the USD 1 per euro level, and the US dollar continues to hold within striking distance of record highs.
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EUR/USD -0.75% |
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USD/JPY +0.53% |
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GBP/USD -0.77% |
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USD/CAD +0.31% |
Macro
The event that moved the markets the most was the aforementioned hawkish performance of Fed chief Jerome Powell in Jackson Hole, but it was not the only interesting event of last week. The surprise for investors was a lower-than-expected reading for the Core CPI Price Index, which is the Fed’s preferred gauge of inflation. The index slowed to 4.6% YoY from 4.8% in June and was below expectations of 4.7%.
According to the second preliminary data, US GDP fell an annualized 0.6% in Q2 2022, unexpectedly above expectations of a 0.9% decline according to the first estimate.
On Tuesday, S&P Global announced its August flash manufacturing and services PMI numbers for the EU, UK and USA. Manufacturing PMI in EA and USA had fallen further into contraction territory. In the eurozone, the composite PMI fell to an 18-month low of 49.2 in August from 49.9 in July. In the UK, business activity almost stagnated in August, with a sharp fall in the manufacturing sector from 52.1 to 46, and the services sector expanded at the slowest pace in 18 months.
July sales of new homes in the USA fell for the sixth month so far this year to the slowest pace since early 2016.
In Germany, the Ifo business climate indicator fell to 88.5 in August, the fresh low since June of 2020, and the GfK consumer confidence indicator for September fell to a new record low of -36.5.
What to watch out for this week
- On Friday, we will wait for the change in non-farm payrolls, the final employment report before the Fed’s September 20-21 meeting. Investors will be curious to see if the Fed can fight inflation with its aggressive monetary policy without triggering a recession in the US. While many areas of the economy are cooling, the labour market has so far remained strong, and in July, the economy added 528,000 jobs. In August, economists expect the economy to have added 285,000 jobs, and the unemployment rate is expected to hold steady at a five-decade low of 3.5%.
- Before Friday’s NFP numbers, the JOLTs Job Opening numbers for July will be released, and the number of job openings is expected to remain high. Then on Wednesday, the newly revamped ADP non-farm payrolls report will be released.
- On Wednesday, we will see the preliminary Eurozone inflation numbers for August, which are expected to rise to 9.0% year-over-year from July’s 8.9%. After the 0.5% rate hike in July, the high numbers are expected to force the ECB to hike further, possibly by as much as 0.75%.
- Final PMI numbers from S&P Global in the EU, UK and US will be released later in the week, as well as PMIs from the Institute for Supply Management. The US will also see an update on consumer confidence from the Conference Board.
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