20 to 27 August: Jerome Powell’s cautious remarks spurred stock markets

Although markets still believe that two additional 25bp hikes by the Fed are a done deal in the second half of this year, the speech by Fed Chairman Jerome Powell at the Jackson Hole Symposium highlighted that the current composition of the FOMC might just be slightly more dovish than it was previously thought. The Fed Chairman’s speech at Jackson Hole revealed some of his dovish bias, as he argued that symmetric risks surrounded the trajectory of Fed fund rates, i.e. hiking too fast could choke growth, while tightening too slowly could overheat the economy and contribute to building up imbalances. Going forward, the Fed’s policy will be data dependent, related to the aforementioned two risk factors.

Stock markets in the US benefitted from Mr. Powell’s remarks, as they touched new historical highs. Meanwhile, US Treasury yields slightly eased and the broad USD index (DXY) lost ground in response to the Fed Chair’s comments. According to Fed funds futures, markets have fully priced in a 25bp hike for the September meeting, and see greater than 67% probability of an additional 25bp hike in December. Whether the hiking cycle continues in 2019 remains highly uncertain.

The approach presented by Mr. Powell was at odds with the message delivered by the latest minutes, in our view. While the minutes strongly implied two further hikes this year, Mr. Powell was significantly more cautious. We are of the view that the number and extent of rate hikes are not the ultimate drivers of global financial markets, but the size of the Federal Reserve’s balance sheet, which will speed up as of October as planned. We think it is important to underline that the change in Chair Powell’s tone may be due to the shifts in global market sentiment and the changing macroeconomic landscape rather than the comments made by President Trump.

Looking ahead

The diary in the US contains macro data with market-moving potential this week. The second read of the headline 2018 Q2 GDP figure should not deliver too much of a surprise, as the median market estimate puts Q2 growth at 4% in SAAR terms, matching the first read. The detailed breakdown, however, bears the potential to move markets, as it might pinpoint whether the Q2 pace is sustainable in the medium run. In the second half of the week, the Fed’s preferred inflation gauge, the PCE, will be released.

Within the Euro Area, Spain, Italy and France will publish their detailed GDP figures from Q2 as well. In addition, the August harmonised CPI inflation rate will be revealed. All of the indicators will serve as guides for markets to potentially re-price expectations for the timing of the first rate hike after asset purchases terminate at the end of December.

Asian markets will mostly focus on Chinese manufacturing PMI and Indian Q2 GDP data this week. Further deceleration of the Chinese manufacturing PMI could re-ignite risk-averse global market sentiment.

Latin American market players will probably focus on the political news flow in Brazil, especially on the latest political polls. Should the market-friendly Ackmin’s polls improve, Brazilian markets could breathe a sign of relief as asset prices might gain. In the second half of the week, the Mexican central bank publishes the latest Inflation Report, the Brazilian Statistical Office releases Q2 GDP, the Colombian central bank board meets, and finally, the Peruvian CPI inflation rate from August is revealed.

The African economic diary is rather light this week. Both Nigeria and South Africa are scheduled to publish monetary aggregates, while Kenya will reveal August CPI inflation.

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