Week ending 2nd September 2022.

As you can see from the accompanying table, global equity markets did not like the hawkish speech Jay Powell (the Fed Chair) gave late last Friday (26 August 2022) at the Jackson Hole Economic Policy Symposium (as an aide-memoire, Jay Powell said that the Fed’s priority was taming inflation – suggesting that policymakers may be planning several more large US interest rate increases, which could damage the US economy).

Global equity markets sentiment was further dented by news that Russia wasn’t reopening its gas pipeline to Europe as planned.

Whilst we don’t want to sound like a broken record, but given economic growth is already slowing, we believe the Fed (or any other central bank for that matter) simply needs to be patient as inflation will soon fall on its volition – in other words, policymakers don’t need to be overly aggressive with interest rate increases, as a recession is not needed to bring inflation down.

Furthermore, we have recently seen that Fed statements made alongside their monetary policy meetings are often very hawkish, but are later played down by Jay Powell during his post-meeting press conference and Q&A session as the meaning of certain words and phrases are questioned and clarified. And Jay Powell’s Jackson Hole speech was effectively a pre-prepared statement without the usual press conference Q&A clarification, meaning that we may find over the coming weeks that the Fed Chair clarifies and effectively dials-back some of the comments.

In fact, we believe today’s (2 September 2022) US employment data could provide Jay Powell with the prime opportunity to pivot and lower the current interest rate trajectory forecasts:  while the economy still added 315,000 new jobs, the unemployment rate rose from 3.5% to 3.7% as the participation rate rose from 62.1% to 62.4% – a very clear sign that US citizens are coming back into the employment market, which will not only ease the labour shortage, but more importantly will help keep a lid on wage growth – and if wage inflation is peaking, this is a very big positive for financial markets.  As an aside, we will be closely watching for any clues of further easing in inflation when the US CPI inflation reading is released on 13 September 2022.

Unfortunately, it is very clear that we will see a continuation of the current elevated equity market volatility.  While we fully understand and appreciate that this volatility is unpleasant and unnerving, it is very important to remember that markets often tend to overshoot on both the upside and downside and so it is best not to get caught up in the day-to-day noise of the market as that can lead to rash decisions, but instead maintain a long-term perspective.

Looking ahead to this coming week, the main event will be the ECB’s monetary policy meeting on Thursday (8 September 2022).  The sharp rise in in energy prices has pushed Eurozone inflation up to 9.1%, which is likely to embolden policymakers to increase Eurozone interest rates by 0.75% despite the fact that economic growth is slowing.

Additionally, on Monday (5 September 2022), US markets are closed for Labor Day, while in the UK we should find out who our new Prime Minister will be.

Elsewhere we have US ISM; US & Chinese trade balances; the Fed’s Beige Book; Chinese Caixin PMI; Chinese CPI & PPI inflation; and Eurozone retail sales.

Investment Management Team