Market Update

As evident from the provided table, global equity markets reacted unfavorably to the hawkish speech delivered by Jay Powell, the Fed Chair, at the Jackson Hole Economic Policy Symposium on Friday, August 26, 2022. Powell emphasized the Fed's commitment to taming inflation, raising concerns that policymakers might implement multiple substantial interest rate hikes in the United States, potentially harming the country's economy.
Market sentiment was further dampened by the news that Russia would not be reopening its gas pipeline to Europe as originally planned.
While we don't want to repeat ourselves, it's worth emphasizing that since economic growth is already decelerating, we believe central banks, including the Fed, should exercise patience. Inflation is expected to decrease naturally, meaning that policymakers don't need to be overly aggressive with interest rate hikes, especially without necessitating a recession to bring down inflation.
Furthermore, it's noteworthy that Fed statements made during their monetary policy meetings are often initially hawkish but later tempered by Jay Powell during his post-meeting press conference and Q&A session. This clarification process helps address questions about the meaning of certain words and phrases. Powell's Jackson Hole speech, however, was essentially a pre-prepared statement without the usual press conference Q&A, suggesting that he may clarify and potentially moderate some of his comments in the coming weeks.
In fact, we believe today's (September 2, 2022) US employment data provides Jay Powell with an opportune moment to pivot and adjust the current interest rate trajectory forecasts. Although the economy added 315,000 new jobs, the unemployment rate increased from 3.5% to 3.7% as the participation rate rose from 62.1% to 62.4%. This clear sign of more US citizens rejoining the job market not only alleviates the labor shortage but, more importantly, helps control wage growth. If wage inflation is indeed peaking, it's a significant positive for financial markets. Additionally, we'll be closely monitoring any signs of further inflation easing when the US CPI inflation reading is released on September 13, 2022.
Unfortunately, it's evident that we'll continue to experience elevated volatility in the equity markets. While we understand that this volatility can be unsettling, it's crucial to remember that market fluctuations often overreact in both directions. It's best to avoid becoming entangled in the daily market noise, as it can lead to impulsive decisions. Maintaining a long-term perspective is advisable.
Looking ahead to the coming week, the key event is the ECB's monetary policy meeting on Thursday, September 8, 2022. The substantial increase in energy prices has driven Eurozone inflation to 9.1%, which is likely to embolden policymakers to implement a 0.75% interest rate hike in the Eurozone, despite the slowdown in economic growth.
Additionally, on Monday, September 5, 2022, US markets will be closed for Labor Day, while the UK is expected to reveal its new Prime Minister.