US Fed maintains hawkish stance

• Jerome Powell struck a hawkish tone in his speech at Jackson Hole on Friday, triggering a selloff in stocks which had rallied on expectations of a “Fed pivot” early next year. While there was nothing really new in Powell’s comments, his language around the Fed’s role in getting inflation back to target was very direct and he stressed that monetary policy would need to be tight “for some time” in order to ensure that inflation expectations remain anchored, even at the cost of “some pain” to households and businesses. Powell also noted that July’s lower than expected inflation reading was not nearly enough to deter the Fed from its course, and that the size of the September hike would depend on all the data up to that meeting. To that end, this Friday’s employment report will be key, as will the August inflation reading.  The market expects non-farm payrolls to have increased by 300k in August, and inflation will likely continue to slow as gasoline prices have eased over the summer.
• US economic data released on Friday was mixed, with both personal income and personal spending coming in weaker than forecast in July at 0.2% and 0.1% respectively, but the University of Michigan consumer sentiment index coming in higher than the preliminary reading at 58.2. Both 1 year and 5-10 year consumer inflation expectations also declined slightly from the July reading.   
• Saudi Arabia’s monetary indicators softened in July, with both money supply and private sector credit growth slowing on an annual basis to 8.1% y/y and 13.8% y/y respectively. Bank claims on public sector enterprises grew 25.6% y/y however, continuing to outpace private sector credit growth. Net foreign assets at the central bank dipped slightly to USD 446.3bn after a sharp rise in June. Consumer spending (point of sales transactions plus ATM withdrawals) were up 4.4% y/y from January to July.

Today’s Economic Data and Events

• UK bank holiday
• 18:30 Dallas Fed Manufacturing Activity (Aug) forecast -12.7

Fixed Income

• Fed chair Jerome Powell pushed back against any notion of an early pivot on monetary policy in his commentary to the Jackson Hole central banking symposium, setting markets up for sustained hikes over the remainder of 2022. Pricing for the next FOMC, on September 21 st, remains nearly evenly split as to whether the Fed will again hike by 75bps or slow down to a still large 50bps hike.
• Reaction in the Treasuries market was briefly choppy in response to the commentary but as the views from Powell at least came within the spectrum of expectations, daily closes were relatively contained. The 2yr UST yield added 3bps to close at 3.3966% in what had been an otherwise volatile week for intraday moves. The 10yr UST yield added less, up by a bit more than 1bps to 3.0409%.

• European bond markets showed more negativity in response to the hawkish tone from central bankers. Yields on the 10yr bund added 7bps to 1.383% while the 10yr French yield was up almost 9bps to over 2% and Italian yields added almost 15bps as the combination of further tightening and a darkening economic outlook take their toll. By contrast the 10yr gilt yield settled lower, down 1bps at 2.598%.

FX

• Currency markets swung back toward the dollar at the end of the week although the magnitudes of the moves were widely split across peers. EURUSD managed a relatively modest drop, moving by less than 0.1% on the close for three days running. The pair settled at 0.9966, its lowest weekly close since November 2002. USDJPY moved heavily at the end of the week, up 0.8% to 137.64 while GBPUSD also had considerable downside, falling by 0.7% to 1.1744.

• In the commodity currencies, all swung against the US dollar at the end of the week with USDCAD up by 0.8% to 1.3033 while AUDUSD fell by 1.2% to 0.6897 and NZDUSD dropped a sharp 1.5% to 0.6137.

Equities

• Equity markets took a tumble on Friday following the hawkish messaging out of the Jackson Hole symposium. US markets took a particular hit, with the interest rate sensitive NASDAQ dropping -3.9% by the close, resulting in a w/w loss of -4.4%. The S&P 500 and the Dow Jones were similarly affected, ending the week down -4.0% and -4.2% respectively.
• While Germany’s GDP reading for the second quarter ended better than on the initial print, other data and a worsening outlook weighed on the DAX, with the index closing down -4.2% w/w on Friday. The FTSE 100 lost -1.6% while the CAC ended -3.4% lower.

• In Asia, moves by the Chinese government to shore up key sectors softened the impact of the deteriorating growth outlook but the Shanghai Composite still lost -0.7% w/w. The Hang Seng closed up 2.0% however. In Japan, the Nikkei lost -1.0%.

Commodities

• Despite the general slump in risk assets generally, oil prices had a decent week with Brent futures up by 4.4% to USD 100.99/b and WTI adding 2.5% to USD 93.06/b. While the chorus of hawkish central bankers may dent the economic outlook even more, the comments from Saudi’s oil minister that the producers’ bloc may seek to limit output at upcoming meetings is helping to provide a floor in oil.
• A steady and persistent rise in US rates, and eventually real and nominal yields, is poison for gold markets and the yellow metal reacted accordingly at the end of the week. Spot gold fell by 1.2% to USD 1,738/troy oz while negative moves were even wider in silver, platinum and palladium.

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