Market Update

Up until today, global equity markets had been experiencing a lackluster and directionless week as all attention was focused on the annual Economic Policy Symposium in Jackson Hole. The spotlight was on Jay Powell, the Fed chair, who was scheduled to speak at 3 pm UK time on August 26, 2022.
In fact, the market's intense focus on Jay Powell's speech led it to largely overlook this week's economic data releases. For instance, sales of new homes in the US declined in July to their slowest pace since January 2016, primarily due to higher interest rates. Furthermore, US durable goods orders remained unchanged in July, significantly weaker than both the 2.2% increase seen last month and the 0.8% increase expected by economists.
Market participants even paid little attention to today's Personal Consumption Expenditures (PCE) readings, which clearly indicated a slowdown in US inflation. The PCE Core Deflator, the Fed's preferred inflation measure, decelerated to 4.6% in July from 4.8% in June. Moreover, the month-on-month headline price inflation registered at -0.1%, marking its first negative reading since April 2020 when the US economy was grappling with coronavirus lockdowns and substantial job losses.
The message from this data appears quite clear to us: the Fed should consider shifting away from its aggressive stance on inflation to a more gradual approach. Otherwise, there's a risk that the Fed, along with other central banks like the BoE and ECB, might tighten monetary conditions excessively by raising interest rates too rapidly and to excessive levels.
In a normal week, this data would typically have had a more significant impact on the markets. However, this week, Jay Powell's speech overshadowed everything else.
In summary, Jay Powell's message emphasized that inflation remained the Fed's primary concern. While the extent of future interest rate hikes would depend on economic data, he underscored the Fed's commitment to raising interest rates and cautioned against prematurely anticipating a policy shift. Powell believes that interest rates should stay elevated for an extended period.
Predictably, these hawkish remarks disappointed financial markets, leading equity markets to close lower today and for the week. The markets now anticipate at least another 0.75% increase in US interest rates at the next policy meeting on September 21, 2022.
While this may be disappointing, it's important to focus on actions rather than words, as interest rate actions are what truly matter now. With both inflation and economic growth slowing down, the prospect of significantly higher interest rates for an extended period may not materialize, especially considering how Jay Powell's previous outlook statements at Jackson Hole have turned out to be inaccurate.
Looking ahead to the upcoming week, we have several significant data releases, including US ISM, US employment data (non-farm payrolls, unemployment rate, participation rate, and average earnings), US factory orders, Eurozone CPI inflation, Chinese PMI, and Japanese industrial production.