Markets last week
The scenic ski resort of Jackson Hole, Wyoming, briefly became the centre of the financial world between Thursday and Saturday last week, when it hosted the US Federal Reserve (Fed) economic symposium from where vital communications for the markets were eagerly awaited.
Before the gathering, markets positioned themselves for a relatively dovish speech from Fed Chair Jay Powell. Although bond yields were well supported, equities behaved as though future rate cuts could be on the cards. There was clearly a discrepancy between traders and the Fed, and it was Powell’s opportunity to reconcile the views.
This he did by delivering an unambiguously hawkish address on Friday, emphasising the need to get the job done by bringing inflation back down to the 2% target and warning markets not to expect premature rate cuts. His message was not tilted by the falling personal consumption expenditures (PCE) inflation rate on the same day, although he acknowledged the green shoots. The communication was eventually received by markets on Friday afternoon our time, with short-term bond yields surging and equities slumping, especially information technology, although the energy sector was spared. The US market was particularly hit by the change in sentiment, with its main indices down 3-4% on the day.
Economic data did not have a massive impact on investments during the week, as markets were focused on the Jackson Hole meeting, but there were also confusing directions among statistics. Surveys were generally weaker, with some Purchasing Managers’ Index (PMI) taking a tumble, but not all. Other surveys and indices were more mixed. Consumers are visibly more depressed than companies, as they have to pay the inflation piper whereas businesses can generally pass it on. In the US, the housing market is now showing clear signs of cracking even if the employment sector is unflinchingly strong.
Going against the flow of the horrible inflation news and ever higher interest rates in the west, China is now providing more stimulus to its economy, one week through lower loan rates, the next through fiscal spending.
The second quarter’s reporting season is almost fully complete, and it is now the third quarter in a row where companies are overwhelmingly beating their earnings estimates. The corporate guidance on future earnings, though, is less rosy and yet profit estimates are still chalking up strong growth for the year ahead, which seems to be at odds with predictions of a slowdown, let alone a recession.
During the week, once again, government bond yields rose. The 10-year gilt hit the highest level since 2014 at 2.70% and finished the week at 2.60%. Following Fed Chair Powell’s speech on Friday from Jackson Hole, short-term bond yields surged, bringing the difference in 2-year yields and 10-year yields to a negative 36 bps. Markets are also starting to price in larger rate hikes for the European Central Bank (ECB) and the Bank of England (BoE).
Once again, equity markets see-sawed between risk-on and risk-off during the week, with technology shares soaring during bullish days and the energy sector leading bearish days. Following Fed Chair Powell’s speech, though, the only positive area was energy and materials were also relatively flat, but the worst were technology, financials and also normally defensive sectors (healthcare, consumer staples, real estate). The weakest markets were the US, Europe and the FTSE 250, whereas Chinese and emerging markets remained unscathed, in part due to being closed during Fed Chair Powell’s speech.
The dollar hit another 20-year high during the week (including Monday) but finished a little below that level. Commodities fluctuated sharply, with Brent oil up 8.7%, copper up 1% but the gold price settled at 0.6% below the previous week’s close.
The week ahead
Wednesday: eurozone CPI estimate for August
Our thoughts: US inflation may well have peaked in June, with the PCE confirming the consumer price index (CPI), but Europe is not in the same place, with the energy crisis still unfolding rather than being in the rear-view mirror. Again, the comparison between the headline and core numbers will highlight how much of European inflation is due to natural gas prices and whether it has spread to other sectors of the economy, like services and rents. This will also help build the odds of future rate hikes from the ECB.
Thursday: ISM manufacturing PMI in the US
Our thoughts: the Institute for Supply Management (ISM) survey is always the most detailed view on the US economy and its many sectors. Next week we get the manufacturing PMI and the following week the services PMI. The headline number will matter, since levels in the 40s tend to indicate a recession ahead. With the last reading at 52.8, any drop below 50 could be an ominous sign. More importantly, though, the details show what’s working and what’s not in the manufacturing sector: new orders, inventories, backlogs, delivery times and, vitally, prices paid.
Friday: US employment data for August
Our thoughts: how high will interest rates have to rise to stop the amazingly strong employment market? The previous month saw the creation of an outsize 528,000 jobs, which will undoubtedly make the Fed’s job even more difficult. The current expectation for August is 300,000, still too much to signify a change in labour conditions and a loosening of the tight jobs market. How many jobs are created, in which sectors, whether the labour force participation rate improves or not, whether hourly earnings are rising, etc, all these questions will have an impact on investor sentiment on Friday.
Markets for the week
In local currency
In sterling
| Index | Last week | YTD | Last week | YTD |
| UK | ||||
| FTSE 100 | -1.6% | 0.6% | -1.6% | 0.6% |
| FTSE 250 | -3.6% | -18.4% | -3.6% | -18.4% |
| FTSE All-Share | -2.0% | -3.1% | -2.0% | -3.1% |
| US | ||||
| US Equities | -4.7% | -15.4% | -3.8% | -2.4% |
| Europe | ||||
| European equities | -4.3% | -16.9% | -3.6% | -15.6% |
| Asia | ||||
| Japanese equities | -2.5% | -2.4% | -3.0% | -6.8% |
| Hong Kong equities | 1.3% | -14.4% | 2.1% | -1.8% |
| Emerging Markets | ||||
| Emerging market equities | -1.0% | -19.5% | -0.1% | -7.1% |
| Government bond yields (yield change in basis points) | Current level | Last Week | YTD | |
| 10-year Gilts | 2.60% | 19 | 163 | |
| 10-year US Treasury | 3.10% | 13 | 159 | |
| 10-year German Bund | 1.50% | 27 | 168 | |
| Currencies | Current level | Last Week | YTD | |
| Sterling/USD | 1.1709 | -1.0% | -13.5% | |
| Sterling/Euro | 1.1713 | -0.6% | -1.5% | |
| Euro/USD | 0.9997 | -0.4% | -12.1% | |
| Japanese yen/USD | 138.72 | -1.3% | -17.0% | |
| Commodities (in USD) | Current level | Last Week | YTD | |
| Brent oil (bbl) | 105.09 | 8.7% | 35.1% | |
| WTI oil (bbl) | 97.01 | 6.9% | 29.0% | |
| Copper (metric tonne) | 8160.5 | 1.0% | -16.0% | |
| Gold (oz) | 1737.09 | -0.6% | -5.0% |
Sources: FTSE, Canaccord Genuity Wealth Management
Central banks/fiscal policy
The Fed is consistent in its message that rates have to go up to beat inflation and won’t come down until the job is done. Other central bank leaders agree.
Minneapolis Fed President Neel Kashkari said that US inflation is very high, and the Fed must act to bring it back under control. “We need to err on making sure we’re getting inflation down, and only relax when we see compelling evidence that inflation is well on its way back down to 2%”.
Atlanta Fed President Raphael Bostic said the Fed still has some way to go on raising interest rates this year. He would like to see the Fed’s main rate tightening campaign completed this year, with the Fed funds rate in the range of 3.5% to 3.75%, up from its current range of 2.25% to 2.5%: “It’s going to be really important that we really make sure that we get inflation well on its way to 2% before we take any steps to increase accommodation in our policy stance”.
Kansas City Fed President Esther George also confirmed that the Fed would not cut rates until they felt comfortable that their 2% target was in sight: “the Fed has to get interest rates higher”.
On Friday, Fed Chair Jerome Powell delivered his long-awaited speech at the Jackson Hole symposium and sounded more hawkish than many investors were anticipating, thereby triggering reactions from the markets, notably a drop in equities and in particular technology shares, a stronger US dollar and higher bond yields. Some of the highlights of his speech are worth noting:
- “Reducing inflation is likely to require a sustained period of below-trend growth.”
- “Inflation is running well above 2%, and high inflation has continued to spread through the economy.”
- ”Restoring price stability will likely require maintaining a restrictive policy stance for some time. The historical record cautions strongly against prematurely loosening policy.”
- “Committee participants’ most recent individual projections showed the median federal funds rate running slightly below 4% through the end of 2023.”
- ”…we must keep at it until the job is done. History shows that the employment costs of bringing down inflation are likely to increase with delay, as high inflation becomes more entrenched in wage and price setting.”
In addition, the other leaders of the world’s central banks (BoE, Swiss National Bank, Bank of Korea) represented at Jackson Hole confirmed the message that bringing inflation down was the most important objective. ECB President Christine Lagarde was not present, ECB Executive Board member Isabel Schnabel urged her colleagues to act “forcefully” against inflation. Bank of Japan (BoJ) Governor Haruhiko Kuroda struck the only dissenting note, saying the BoJ had no choice but to keep easing monetary policy, in light of the “miraculous” 2.4% inflation rate in Japan.
China added $146bn of fiscal stimulus to its economy, mostly infrastructure spending.
United States
Inconsistent data across parts of the economy. Only clear area, though, is the much weaker housing market. Confirmation of relief on inflation from the PCE.
Surveys: the Chicago Fed National Activity Index rose against expectations from -0.25 to +0.27, a large move for that index, which is normally very flat.
The Standard & Poor’s Global Services PMI dropped from 47.3 to 44.1 with the manufacturing PMI more resilient at 51.3 vs 52.2. Also, after the mixed but bad Empire State/Philly Fed pair of surveys, the Richmond Fed manufacturing index fell from 0 to -8. The Kansas City Fed Manufacturing Activity fell from 13 to 3.
Finally, the University of Michigan Sentiment Index was revised upwards from 55.1 to 58.2, with current conditions rising from 55.5 to 58.6 and expectations from 54.9 to 58.0.
Housing: new home sales were down 12.6% in July, pending home sales down 1.0% and MBA mortgage applications down 1.2%, all confirming the housing market weakness.
Industry: durable goods were flat in July, but excluding transportation they increased 0.3%, showing slowing capital expenditures. Wholesale inventories were up 0.8% in July, down from 1.9% the previous month and likewise retail inventories slowed from 1.9% to 1.1%.
Consumer: personal income rose 0.2% in July, lower than the previous 0.7% and below estimates. Personal spending also disappointed, up 0.1% vs. 1.0% the prior month.
Employment: jobless claims had a second week down in the middle of an upward trend. The differences are small (243,000 vs. 245,000 for initial claims and 1,415,000 vs. 1,434,000 for continuing claims) but it highlights how difficult it could be to loosen the tight labour market.
Inflation: the PCE deflator fell from 6.8% to 6.3%, with the PCE core deflator (ex food and energy) also down from 4.8% to 4.6%. The latter number is the inflation gauge used by the Fed. The University of Michigan inflation expectations were revised downwards, with the 1-year inflation from 5.0% to 4.8% and the 5-10-year inflation from 3.0% to 2.9%.
United Kingdom
Mixed surveys with manufacturing suffering the most
Surveys: the S&P Global Manufacturing PMI slumped from 52.1 to 46.0 (which is a recessionary level) whereas the services PMI was almost unchanged at 52.5 from 52.6.
The Confederation of British Industry (CBI) Trends surveys were mixed, with total orders dropping from +8 to -7 but selling prices up from 48 to 57.
The CBI Retailing survey looked much better in August, with the total distribution reported sales up from -12 to +11 and retailing reported sales up from -4 to +37.
Europe
Differences among consumers from country to country but business appears resilient
Surveys: the eurozone manufacturing PMI was almost flat from 49.8 to 49.7 but the services PMI fell from 51.2 to 50.2. Eurozone consumer confidence was a touch better at -24.9 vs -27.0.
The German IFO, a business survey of 7,000 companies, was a smidge down on business climate (88.5 vs. 88.7), current assessment (97.5 vs. 97.7) and expectations (80.3 vs. 80.4), but generally better than expected. On the other hand, the GfK consumer confidence survey dropped from -30.9 to -36.5, the worst level since the survey’s inception in 2005. French consumer confidence was somewhat better, however, rising from 80 to 82, business confidence was unchanged at 103, manufacturing confidence was down from 106 to 104, but the production outlook indicator was up from -5 to -2.
Growth: the German Q2 GDP was not as bad as expected, at +0.1% compared to a first reading of 0.0%.
Money supply: eurozone money supply (M3) fell a little from 5.7% year-on-year to 5.5% in July.
China/India/Japan/Asia
Softer Japanese surveys and Chinese profits
China: industrial profits in July fell 1.1% year-on-year, from +1.0% the previous month.
Japan: the PMIs fell, with manufacturing down from 52.1 to 51.0 and services from 50.3 to 49.2. The PPI (producer price index) services remained at 2.1% year-on-year in July.
Oil/Commodities/Emerging Markets
Oil bounces back
Commodity markets were influenced by interest rate expectations ahead of the Jackson Hole symposium. At the end of our bank holiday, crude oil was much stronger, rallying 6.9% for the US gauge WTI and as much as 8.7% for the international gauge Brent, copper rose 1% but gold corrected 0.6% after some fluctuation during the week.
