Wyoming may be the least populous state in the US, but every August for just a couple of days, it becomes the centre and sole focus for investment markets. This year was no different as Fed Chair Jay Powell sent stocks sharply lower, as a result of his speech at the Jackson Hole Symposium. Further details are below, but the Powell speech essentially stated that there was still much work to be done to tame inflation, and very much set the expectation of a 0.75% rate increase in September, with more to follow before year end.
Friday was the 7th time this year that US stocks had finished down more than 3%, far more than the historical average. This can be interpreted in several ways, but the binary reaction of markets to commentary from the Fed strengthens the argument that uncertainty over the direction and pace of the key economic metrics of inflation, interest rates, and economic growth remains. The Fed’s preferred inflation indicator, PCE, cooled more than expected in July. But the core figure remains at 4.6% - easily more than double the Fed’s 2% target. Make of that what you will.
Whilst slightly under the radar, volatility remains in eurozone bond markets as the ECB withdraws stimulus. For example, the 10-year German Bund yield moved more than 10bps (0.1%) on just one day in 2021. So far in 2022, this has happened 79 times. The flexibility of active management has always been key in bond markets – now so more than ever.
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Weekly Investment News
Stock markets fell sharply into the weekend as Friday marked the worst day for stocks since June. It was a quiet week until Friday for markets, when Jay Powell’s speech at Jackson Hole sending stocks down more than 3%. Technology and growth stocks fared worst as the market interpreted the comments from the Fed Chair to be hawkish and signaling that the path of higher interest rates remains very much intact. 99% of stocks on the S&P 500 fell on the day. Government bonds took the comments more in their stride, with offerings at the shorter end of the US treasury curve seeing prices fall slightly, with those further out (e.g., 10-year bonds) seeing yields close flat for the day.
On balance, economic data last week was broadly negative. The composite PMI in the US came in at 45.5, with the eurozone figure at 49.2. Both coming in below the key 50 mark that indicates a contraction. The UK figure stayed in expansion territory at 50.9, buoyed by the services reading. US new home sales slipped further last month, with the figure coming in at -12.6% versus an expectation of -2.5%. Whilst a negative reading was forecast, the scale of the decline garnered much attention. The US Q2 GDP figure was revised slightly upwards to -0.6% from the initial reading of -0.7%. Both personal income and spending rose less than expected in the US, as the PCE index cooled in July. However, the key metric is still 6.3% higher than a year ago.
In Europe, energy and electricity prices continue to rise as Russia’s Gazprom announced that Nord Stream 1 will see further ‘maintenance related disruptions’ from early September. Governments continue to attempt to implement contingency plans as Winter begins to loom. The EUR/USD rate traded below parity for much of the week as the slowing economic outlook and energy crisis weigh on the single currency bloc.
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