Week ending 25th August 2023.

As you can see from the accompanying table markets mostly closed the week higher.

On Friday (25 August) Jerome Powell’s much anticipated speech at the Jackson Hole symposium provided limited additional insights. Powell dismissed the idea of altering the inflation target of 2%, concluding that the uncertain situation required navigating with limited clarity, likening it being guided by the stars under cloudy skies.

The speech’s main takeaway was a somewhat vague message about the potential for further rate hikes if economic data warrants resulted in a subdued market reaction.

Following a period of aggressive rate increases since 2022, Powell indicated that the approach has transitioned to a phase of cautiousness, where policymakers are mindful of the potential consequences of excessive tightening.

He acknowledged that higher rates had slowed industrial production and wage growth, while tighter lending standards were dampening the economy. Nevertheless, Powell observed that economic growth remained above its long-term trend, and the housing sector seemed to be recovering after a substantial slowdown in the past year and a half.

He stated that the Fed will exercise caution in deciding whether to implement further rate hikes in the coming months. However, he didn’t seem to imply that the enduring strength of economic growth would automatically lead to more tightening measures.

Economic data-wise, US durable goods orders showed increased business caution, and the housing sector exhibited strength in new home sales, while existing home sales disappointed. Preliminary data also highlighted a decline in the US Manufacturing PMI from 49 in July to 47 in August, signalling a significant dip in operating conditions. Services PMI also fell to 51 in August, showing the slowest expansion in six months, possibly due to high interest rates and inflationary pressures affecting consumer spending.

The challenge ahead involves understanding how tightening monetary policy will impact the economy, which is already showing some effects despite not being fully reflected in growth data.

In the UK, investors mulled over recent consumer confidence survey results for August 2023, uncovering an uptick in confidence over the period, although the index remained in negative territory. Despite the backdrop of slow declining core inflation, elevated interest rates, and rising average weekly earnings, the consumer confidence index demonstrated a positive trajectory for this month. Although the overall figure continues to stand at a notable -25, prospects for personal financial situations in the upcoming year are trending towards positivity.

Coming up next week we have Japanese Unemployment Rate & retail sales as well as US Consumer Confidence, labour market data and the Fed’s preferred measure of inflation Core PCE. Markets are also expecting Chinese PMIs, ECB Minutes, Eurozone CPI and Unemployment Rate.

Kate Mimnagh, Portfolio Economist