21 to 27 August: Nothing to See

In last week’s edition, we commented on the current environment of abnormally low inflation relative to the breadth and strength of global growth. We argued that this was related to a number of factors including mis-measurement of resource utilisation and overall pessimism about the long-term business environment. As a consequence, we expected monetary policy would remain accommodative for longer than usual and, therefore, that the Goldilocks (not too hot, not too cold) economic backdrop for markets could continue. In this way, we saw the principal risk to markets coming from the political, rather than central banking, sphere.

At the Jackson Hole Economic Symposium, these dynamics appeared to be very much in evidence. Unlike in prior years, where policymakers have used the event to deliver strong signals on future policy, both Janet Yellen and Mario Draghi preferred to “wait and see”, revealing little market sensitive information:

• The FED Chair spoke on financial stability and alluded to neither inflation nor rate normalisation. In particular, she defended post-GFC financial regulation therefore distancing herself from
• Donald Trump’s anti-regulation rhetoric. As a reminder, Yellen’s term ends in February and she is unlikely to be re-appointed.
  The ECB Chief also focused his speech on post-crisis financial regulation, before offering a defence of free trade.

Elsewhere, we continue to hold a positive stance on Brazil as the country emerges from recession, the central bank continues to cut rates and there is an increasing focus on reform rather than political scandal (see below). There is also a “tactical” appeal, given large outflows following the Temer corruption allegations.

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