Business research

Markets today: Investors react to Powell’s comments

Today’s Podcast

Preview Short, but not sweet

  • Powell at JH short but not sweet – pain ahead for households and businesses
  • Stocks fell sharply after Powell, helping limit the rise in US Treasury yields to 1-3 basis points
  • US core PCE deflator weaker than expected, UoM inflation expectations also relevant
  • Some ECB officials now eye 75bp hike on Sept. 8, preliminary QT talk
  • A hawkish speech also from Schnabel and Villeroy of the ECB in Jackson Hole
  • EUR supported by ECB discussions but BBDXY still at 0.5%; USD 0.70
  • AU retail sales today; Chinese PMI, EZ CPI, US ISM, non-farm payrolls over the week

Fed Chairman Jay Powell’s speech at the Kansas Fed’s Jackson Hole Symposium on Friday was short and, as far as stock market investors are concerned, bitter and not sweet. The three major US equity indices lost more than 3%, led by a 3.9% drop for the NASDAQ (S&P500 -3.4%). It was probably this, rather than what the Fed Chairman had to say, that limited the post-Powell rally in US Treasury yields to 3bps for 2s and just 1.5bps for the 10-year-old – albeit with a little help from entrants. US economic data (notably PCE deflators 1/10% below expectations). The USD strengthened across the board, with gains led by losses in the most growth-sensitive/pro-cyclical currencies, AUD (-1.2%) and NZD (-1.5%). %). 50bps or 75bps from the Fed on Sept. 21 is still in the air (heavily dependent on data, would you believe it?) but Jay Powell doesn’t think the Fed will cut rates in 2023. Meanwhile, in Europe, the clamor among ECB hawks for a 75 basis point hike on Sept. 8 has begun.

Fed Chairman Powell’s speech in Jackson Hole was less than 1,300 words (it fits on two A4 pages) and lasted no more than 8 minutes, prefaced by Powell saying, “My remarks will be shorter, my narrower focus and my message more direct” (than in previous years). Restoring price stability “will take some time” and “will likely require a prolonged period of below-trend growth” which “will also cause difficulties to households and businesses,” Powell said. “But a failure to restore price stability would mean far greater pain,” he added.

After referring to the second successive 75 basis point rate hike in as many meetings, Powell said “our decision at the September meeting will depend on the totality of incoming data and the evolving outlook.” Read this to mean that the decision will be between 50bps and 75bps. Markets were valued 66.5 basis points from the September tightening before Powell and ended Friday virtually unchanged (66.9 basis points). So another toss-up. The September 13 CPI, just over a week before the FOMC, is going to be important (in this regard, Powell called July’s lower inflation readings “welcome”).

There were forward-looking indications of all sorts of things in the talk, via an implied pushback against market prices for rate cuts in 2023. Namely, “The historical record strongly cautions against premature policy easing. . The most recent individual projections from participants at the June SEP committee showed the median federal funds rate to be just below 4% through the end of 2023. Participants will update their projections at the September meeting. “. (I can bet you they won’t, on average, be lower).

Friday and weekly actions

It was pretty much one-sided for stocks after Powell, with the S&P500 falling from 4,200 to end just above 4,050. IT, the most interest rate sensitive sector, led the decline by 3.4% (-4.3%), followed by consumer discretionary (3.9%), with energy faring the least badly (-1.1%) thanks to a slight increase in prices oil (crude back above $100) and no drop in gas prices (the European TTF price was just €3 from the previous day’s high of €311 per megawatt hour).

US Treasuries Friday and Weekly

The bond market’s limited movements after Powell’s no doubt say the market was well prepared for hawkish comments, although the only small-scale yield increases on the curve likely reflected the favorable influence of the subsequent sharp market sell-off. stock market (equity investors obviously hadn’t received the hawkish memo before the event). Still at the fringe, the bond market drew some support from a 1/10% downside surprise on July PCE deflators (headline 6.3% from 6.8%, core 4.6% from 4 .8%) and also a 1/10% decline in the University of Michigan’s final reading of 5-10 year inflation expectations to 2.9% from 3.0%.

Incidentally, the final UoM consumer sentiment index came in at 58, well above the preliminary 55.1 (i.e. lower gasoline prices for you) while personal income (0.2%) and personal spending (0.2%) were both a few tenths weaker than expected. Also on the good news side, the Advance July trade balance was almost $10 billion below expectations at $89.1 billion (consensus – $98.5 billion) – a positive contributor to Q3 GDP, towards which the Atlanta Fed’s latest Nowcast GDP estimate is currently 1.6%, down from 1.4% before Friday’s data.

There was also some sensitive market news from Europe on Friday, in particular a Reuters source saying some ECB Governing Council members want to discuss a 75 basis point interest rate hike. next month. Not to be outdone, Bloomberg published a report later in the day indicating that some ECB officials wanted to start a debate before the end of the year on quantitative tightening. No prizes for guessing which GC members might have been behind the Reuters report, with known GC hawks Knot and Holtzmann both giving interviews on Friday saying 75 basis points should be on the table for discussion at the September 8 meeting. The money market moved from a price increase of 55 basis points at Thursday’s close to around 62.5 basis points on Friday.
On top of that, in Jackson Hole, ECB GC member Isabel Schnabel (also a known hawk) and Banque de France Governor and GC member Villeroy de Galhau warned that a “sacrifice” more important – in terms of weaker growth and weaker job creation – will be needed to bring inflation under control than in previous episodes of monetary tightening and that price growth is likely to “slip” if strong measures are not taken. not taken. Villeroy is taking advantage of the end to secure a rate hike beyond the neutral level – which he estimates between 1% and 2% and that he could reach this level “before the end of the year”

The UK news of note was energy price regulator Ofgem, which raised the household gas price cap to £3,549 from £1,971 a year – up 80% and about where it is. had to be fixed. Under current methodologies, a further increase to ~£4,500 is to be expected next January. Current UK Chancellor Zahawi, speaking shortly after Ofgem’s announcement, said the higher cap “would cause stress and anxiety for many people, but help is coming”, pointing to the measures that the government has confirmed. “As Putin drives up energy prices in revenge for our support for Ukraine’s courageous struggle for freedom, I am working hard to develop options for additional support,” he said. he added, insisting that the new Prime Minister will have the tools to “be operational”. “and provide assistance where needed”. Note that the process of electing the new Conservative leader and therefore the Prime Minister ends on September 5.

FX Friday and Weekly

In the FX market, the USD received widespread support from Powell’s message and its impact on the performance of risky assets more than directly from the rates market, on which, as far as old gilts are concerned, the European bond yield rose much more than in the United States (eg Bunds +7.3 basis points). Along with the stock market selloff, the VIX ended Friday at 25.6 from 21.8, its highest since mid-July. The DXY USD Index rose 0.3% and the broader BBDXY 0.45% (thanks to its smaller EUR weighting, with EUR/USD drawing some support from ECB news, down only 0.1% over the day). The GBP is doing much worse than the EUR (-0.7%) but it is the pro-cyclical CAD (-0.8%) NOK (-1.0%), AUD (-1.2 %) and NZD (1.50%) which carried the weight of equities the market sell-off and messages from Powell regarding an extended period of below-trend growth in the US.

After (very briefly) revisiting the levels above 7.00 either side of Powell (0.7007 high), it ended the day and week just below 0.69 and on the lows of the day (0.6891). Over the week, the AUD/USD is the second best performing G10 currency after the NOK, up 0.3%. In contrast, the NZD took the wooden spoon of the G10, -0.9% on the week, meaning AUD/NZD rose above 1.12, its strongest since October 2017.

Goods Friday and Weekly

Coming

  • Lots of top data to focus on this week as we look to central bank decisions from the RBA, ECB and Bank of Canada next week and from the Fed and Bank of England more later in the month. It starts today with Australian retail sales for July (consensus and NAB 0.3%). The UK is on holiday on Monday.
  • Looking to the week, the highlights appear to be China’s August PMIs and Eurozone CPI on Wednesday (seen coming in at 9%, prefaced by Germany’s CPI the day before) and then the ISM US manufacturing on Thursday ahead of nonfarm payrolls on Friday. Outside of the data schedule, the NordStream1 gas pipeline is to be shut down for three days starting Wednesday. Will gas flows resume on Saturday?
  • Check out our What to Watch post for all the details for the week ahead.

Market price

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