Powell warns there could be more to come

Fed Chair Jerome Powell addressed the Jackson Hole symposium in Wyoming on Friday, where he maintained a relatively hawkish line on the future trajectory of US interest rates, saying that while inflation had come down, ‘it remains too high’, and stressing that the FOMC was ‘prepared to raise rates further if appropriate.’ Nevertheless, he also hinted that the next meeting would see a hold by the rate setting committee as he stated that ‘at upcoming meetings we are in a position to proceed carefully’.

ECB President Christine Lagarde was also speaking on Friday, and she delivered a similar message to Powell’s, stressing that the ECB would continue to set their benchmark interest rates ‘at sufficiently restrictive levels for as long as necessary.’ She focused on long-term structural changes to the global economy in her speech, addressing the potential inflationary pressures from labour market stresses and diminished global competition.

The US University of Michigan consumer sentiment survey was revised down on its second reading, now standing at 69.5 compared with 71.2 on the initial print. Inflation expectations over the next are at 3.5%, up from 3.4% in the July survey.

Germany’s IFO survey deteriorated in August as the business climate reading came in at 85.7, down from 87.4 in July and lower than the consensus prediction of 86.8. Both the current assessment and the expectations components disappointed. Q2 GDP growth was confirmed at 0.0% q/q on the second reading, with the Eurozone’s largest economy dodging recession by the slimmest of margins. However, going by recent timely data such as the IFO survey, the outlook for Q3 is weak. On an annual basis, GDP was down 0.2% y/y.

Today’s Economic Data and Events

• No major data releases scheduled for today

Fixed Income

• US Treasuries pulled weaker in response to Fed chair Jerome Powell’s speech at the Jackson Hole symposium. His messaging that the Fed could indeed raise rates further helped to push the 2yr yield to nearly 5.1% at one point before the moves faded later in the session. Powell’s comments further committed the Fed to data dependency for rates which given the mixed data coming out of the US economy will likely keep markets on edge.
• Yields on the 2yr UST closed up 5bps on Friday to 5.0779% while the 10yr had some choppy moves around Powell’s commentary but closed near unchanged at 4.2354%. Market pricing of one more rate hike by the end of the year ticked up in response to Powell’s speech but are still below 50% probability.
• European bonds also closed weaker at the end of the week with bund yields up 5bps to 2.556% and gilt yields rising 2bps to 4.436%.
• Bond markets generally had a quiet close to the week. It will be relatively limited week for central banks with several ECB and Fed speakers by the end of the week.

FX

• Currency markets swung sharply at the onset of Powell’s speech but most pairs tilted lower against the dollar by the end of the session. EURUSD faded an initial pop to 1.0840 before ending the day lower by 0.1% at 1.0796 while GBPUSD dropped 0.2% to 1.2578. USDJPY added 0.4% to rise for a second day in a row, closing at 146.44.
• Commodity currencies fared little better with USDCAD up 0.1% to 1.3601 while AUDUSD fell 0.2% to 0.6404 and NZDUSD dropped 0.3% to 0.5908.

Equities

• The trading in equities was quite volatile last week, but by Friday most major global indices had gained on the previous week’s close, albeit with some performing more strongly than others. East Asian indices were comparatively weak as the Hang Seng closed up by just 0.03%, while the Shanghai Composite ended down 2.2% despite some more policy announcements from the government. The Nikkei closed up 0.6% w/w but this was despite a heavy 2.1% drop on Friday.
•  In Europe, the FTSE 100 was the notable gainer as it ended Friday up 1.1%, while the DAX gained 0.4% and the CAC 0.9%.
• In the US, the Dow Jones ended the week lower, dropping 0.5% w/w despite gains on Friday. The S&P 500 (0.8%) and the NASDAQ (2.3%) both closed higher w/w however.
• China has announced stimulus measures for stock market, which has seen a sharp jump in equity markets on the first day of the week with the Shanghai Composite up 2.7% at the time of writing. Stamp duty on stock trades will be reduced and the pace of IPOs will be slowed.

Commodities

• Oil prices managed a decent gain at the end of the week with Brent futures up 1.3% at USD 84.48/b and WTI adding about 1% to USD 79.83/b. Their gains on Friday helped to temper what was otherwise a weekly loss for both contracts. Negative news out of China along with the apparent recovery in Iranian crude export volumes will both weigh on oil markets in the near term.