How will global investors react to the overriding message from the Central Bankers Lovin-in at Jackson Hole? Aussie markets were 2% down on Monday morning.
Federal Reserve Chair Jerome Powell’s stern message was that interest rates are going higher for longer in a painful fight against inflation. Be clear, he quashed thoughts that the trajectory of monetary tightening could soon be tempered.
Investors now see the Fed’s policy rate peaking in March at around 3.80% and pared bets on a decline in 2023. The US yield curve between the five and 30-year maturities inverted for the second time this month, while the gap between the higher two-year yield and the 10-year rate widened.
The inversions suggest the bond market anticipates a recession is the necessary sacrifice to get price pressures back under control. Though I note already, some bank economists are saying, this is all talk, because the bond market hardly reacted.
Expect to hear more on the trade-off between higher rates of inflation and higher unemployment, and whether the 2-3% targeting which has become a cornerstone of Central Bank doctrine is relevant. Meantime, other than commodities, and the USD, there is nowhere to hide – and Bitcoin came down in sympathy.
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Remember when the mantra from Central bankers was inflation was temporary? This was still being recited late last year, despite the rapidly expanding money supply created by the reaction to COVID (which had already been expanded by the reaction to the GFC in 2007 and beyond.
Ultra-low interest rates were coupled with excessive Government fiscal support from direct payments to businesses and households, and indirect support to businesses. This combined stoked home prices, and credit growth, in an attempt to maximise employment and sheeted inflation mainly to supply chain disruptions which would sort themselves out. RBA Governor Lowe late last year said no rate rise until 2024, and only recently changed his tune.
But fast forward just 6 months, and the tone has been changed completely, with a bevy of the world’s top central bankers delivering a stern and unified message on the need to curb inflation, declaring at Jackson Hole that it is broad based, here to stay and will require their forceful action. Like lemmings, they are now all running to the “must kill off rampant inflation at all costs” exit instead.
Begs the question, were they wrong then, or are they wrong now? And whilst they plan to lift rates significantly higher, will it actually tame inflation or not? And what collateral damage will these rate increases cause? I for one have little confidence in the whole Central Planners and Bankers edifice. They are of course unaccountable, and unelected.
In today’s market review we are going to focus on Fed Chair Jerome Powell speech at Jackson Hole, just 9 minutes in length but enough to move the markets down significantly.
For the Fed’s monetary policies to have any effect, markets must transmit them via the financial conditions to the actual economy. And the Fed needs to make sure this happens. And today was an effort by Powell to get this job done.
Speech: https://youtu.be/vhMRynjm3CI
The speech was one of the strongest ever by the Fed chief, reflecting the onerous burden borne by the central bank in curbing inflation retreating ever so slowly from four-decade highs.
First Powell said inflation needed to be controlled. That was their main mandate.
Next he signalled there will be more rate hikes in the months ahead, taking the cash rate well above the neutral rate – meaning that they intend to deliberately slow the economy.
And he acknowledged this will hurt households and businesses.
And acknowledge that the current labour market was out of wack.
So, this message cut directly across the ranks of those saying the FED will pivot – arguing the FED has really been signalling that it would soon “pause” the rate hikes or “pivot” to rate cuts, even though the Fed had raised its policy rates four times this year, including twice by 75 basis points, the biggest rate hikes in years.
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Is the US in recession or not? Well the “official figures” are unsure, and despite the inverted yield curve (2-10) you can still argue there is no recession, which gives latitude to the Fed to hike further and faster.
We may hear something about this at Jackson Hole, the Central Bankers’ love-in!
Go to the Walk The World Universe at https://walktheworld.com.au/
Is the US in recession or not? Well the “official figures” are unsure, and despite the inverted yield curve (2-10) you can still argue there is no recession, which gives latitude to the Fed to hike further and faster. We may hear something about this at Jackson Hole, the Central Bankers’ love-in!
Go to the Walk The World Universe at https://walktheworld.com.au/
A quick update on the Fed moves overnight, as they lift by 75 basis points, with more to come. No, the US is not in recession Powell said, and there was a strong underlying economy, with high employment levels.
Hopium? We will see.
Go to the Walk The World Universe at https://walktheworld.com.au/
We are coming to the pointy end of the action now, with the Nasdaq closing lower on Monday after a choppy session for U.S. equities ahead of a big week of technology earnings reports while oil prices rose and treasury yields edged higher as investors braced for a Federal Reserve interest rate hike.
The S&P 500 see-sawed on Monday and ended close to unchanged.
Meanwhile in Australia the head of APRA, the entity responsible for banking supervision is going, while the local bond market is in pieces.
In currencies, the dollar index, which touched a 20-year high this month, was down slightly and gold also slipped, as did bitcoin.
Concern that rising interest rates will drive the economy into a recession has been escalating as the Fed tightens monetary policy aggressively to bring down the steepest inflation in four decades. Fed Chair Jerome Powell has said that failing to restore price stability would be a “bigger mistake” than pushing the US into a recession, which he has continued to maintain the nation can avoid.
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Stocks wobbled but ultimately ended lower on Wednesday, as the fastest pace of inflation in decades stoked bets that the Federal Reserve will be forced to deliver a much larger than expected 1% rate hike later this year. The S&P 500 closed down 0.5%, the Dow Jones Industrial Average fell 0.7%, or 208 points, the Nasdaq fell 0.1%.
U.S. inflation rose 9.1% in June to hit a fresh four-decade high, topping economists’ forecast for a 9% rise, driven by an 11.2% leap in gas prices and a 1.0% increase in food prices.
This report will make for very uncomfortable reading at the Fed,” it added. US inflation roared again to a fresh four-decade high last month, likely strengthening the Federal Reserve’s resolve to aggressively raise interest rates that risks upending the economic expansion.
The widely followed inflation gauge increased 1.3% from a month earlier, the most since 2005, reflecting higher gasoline, shelter and food costs. The so-called core CPI, which strips out the more volatile food and energy components, advanced 0.7% from the prior month and 5.9% from a year ago, above forecasts.
The red-hot inflation figures reaffirm that price pressures are rampant and widespread throughout the economy and taking a bigger toll on real wages, which are down the most ever in data back to 2007. The inflation data will keep Fed officials on an aggressive policy course to rein in demand, and adds pressure to President Joe Biden and congressional Democrats whose support has slumped ahead of midterm elections.
“Rather than cooling down, inflation is heating up,” Sal Guatieri, senior economist at BMO Capital Markets, said in a note. “While a pullback in gasoline costs in July and reported retail discounting will help tamp down the flames, the broad pressure in the core rate, led by plenty of inertia in rents, suggests inflation may not peak for a while, and might remain stubbornly high for longer than anticipated.”
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Today’s post is brought to you by Ribbon Property Consultants.
If you are buying your home in Sydney’s contentious market, you do not need to stand alone. This is the time you need to have Edwin from Ribbon Property Consultants standing along side you.
Buying property, is both challenging and adversarial. The vendor has a professional on their side.
Emotions run high – price discovery and price transparency are hard to find – then there is the wasted time and financial investment you make.
Edwin understands your needs. So why not engage a licensed professional to stand alongside you. With RPC you know you have: experience, knowledge, and master negotiators, looking after your best interest.
Shoot Ribbon an email on info@ribbonproperty.com.au & use promo code: DFA-WTW/MARTIN to receive your 10% DISCOUNT OFFER.
There was an outstanding piece from John Authers this week arguing that the Age of Credibility for Central Banks Is over as Inflation blunders have destroyed the trust that’s anchored the global financial system since the end of the gold standard.
Certainly, in Australia, the RBA has been on shaky ground for many years, including over forecasting wages growth, taking interest rates too low, and relying on household wealth to be artificially inflated by poor policy for years. But the shocking reversal from last November’s no rate rises til 2024, to todays 1.35% target cash rate, with more to come, shows just how far from credible they are – despite politicians still talking about mountains of respect. Over in New Zealand they are further up the curve, but the issues are the same. Central Bank credibility is shot.
It appears that the most likely anchor to replace central bank credibility is confidence in governments. But that is not a comforting thought.
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While the technical definition of a recession traditionally is two quarters of contraction or negative growth, I think that definition is frankly irrelevant given where we are today.
You simply have to look at the trends in consumer confidence, which are ultra-low in many western countries, from Australia, New Zealand, the UK and the US. And what is driving this is the concern about inflation – which is why central banks are jaw-boning their ability to get inflation under control. Quite simply, people’s money is disappearing fast, and they’re worried it could get a lot worse.
By the way, pause for a moment to ask why a 2-3% inflation target is used – it have become a convention, but there is little to explain why that number is correct. The truth is, that number was grabbed from thin air years ago, and has taken on a life of its own.
Note that Goldman Sachs Group Inc. economists put the risk of such a slump in the US in the next year at 30%. Others put the probability considerably higher, with the risks building beyond that time frame. But for many it already feels like it’s here.
Go to the Walk The World Universe at https://walktheworld.com.au/
Today’s post is brought to you by Ribbon Property Consultants.
If you are buying your home in Sydney’s contentious market, you do not need to stand alone. This is the time you need to have Edwin from Ribbon Property Consultants standing along side you.
Buying property, is both challenging and adversarial. The vendor has a professional on their side.
Emotions run high – price discovery and price transparency are hard to find – then there is the wasted time and financial investment you make.
Edwin understands your needs. So why not engage a licensed professional to stand alongside you. With RPC you know you have: experience, knowledge, and master negotiators, looking after your best interest.
Shoot Ribbon an email on info@ribbonproperty.com.au & use promo code: DFA-WTW/MARTIN to receive your 10% DISCOUNT OFFER.
