Jackson Hole Comments Contribute to Stock Decline, U.S. Jobs Market Expected to Remain Strong
Last Week Review
Global equities declined 2.9%, led by a drop in U.S. equities, bringing the year-to-date decline to 15.5%. The two-year Treasury yield increased 0.16% to 3.40% while the 10-year yield rose 0.07% to 3.04%. Fairly hawkish comments from Federal Reserve officials contributed to the rise in interest rates and decline in equities. High yield credit spreads widened 0.21% to 4.54% and investment grade spreads increased 0.01% to 1.28%.
Hawkish Tone from Jackson Hole
Leading up to Fed Chairman Jerome Powell’s Jackson Hole speech on Friday, other Fed members talked up the need to continue tightening policy to control inflation. Powell agreed, noting that: (1) restoring price stability may require a restrictive policy stance for some time; (2) history cautions against premature policy loosening; and (3) some economic pain is likely. He reiterated that the size of upcoming hikes will depend on incoming data. More recently, investors have priced in a more aggressive Fed. There was some relief that Powell’s speech was apparently not perceived to overly exceed the hawkish expectations that was already priced in. Still, Treasury yields slightly rose and U.S. equity markets declined on comments from the inflation-focused Fed.
Purchasing Managers Data Disappoints, Inflation Cools
Flash Purchasing Managers’ Index data for August broadly fell below expectations. U.S. services is in contraction (below 50), declining to 44.1 from 47.3. For manufacturing, the U.S. continues to expand (though the score declined from last month) while the eurozone, U.K. and Japan contract. The data exhibited some evidence of easing cost and supply chain pressures. The lower-than-expected U.S. core Personal Consumption Expenditures Index also indicated cooling inflation. U.S. labor market data remained strong as initial jobless claims stayed low last week.
China Ramps Up Stimulus Efforts
The People’s Bank of China cut its prime rates by 0.05% for one-year loans and 0.15% for five-year loans. Also, the State Council of China announced $146 billion in measures aimed at easing economic pressures, particularly within the property sector. China’s economic activity remains challenged. The stimulus is unlikely to reverse the narrative, but it does help provide some relief.
Biden Forgives Student Loans
U.S. President Joe Biden announced that he will cancel up to $10,000 in student loans for most Americans making less than $125,000 per year. His administration plans to extend the repayment pause through the end of this year. Neither of these developments were entirely unexpected, and we see limited near-term financial market impact.
This Week’s Preview
Ukraine War and Europe Energy Crisis
The war against Ukraine is at somewhat of a stalemate but continues to be an important risk to investors. Russia’s intensifying export cuts on gas supply continues to fuel the European energy crisis and impacts near-term energy prices, growth prospects and to some extent central bank policy. Russia announced that gas flows through the Nord Stream 1 pipeline are scheduled to be shut off again for maintenance from August 31 through September 2.
U.S. Jobs Report on Friday
The U.S. labor market is expected to remain strong with a projected July unemployment rate of 3.5%, unchanged wage growth of 5.2% year-over-year and 300,000 jobs added versus 528,000 in June. While a stronger than expected labor market would support economic resiliency (generally positive for risk assets), it may give the Fed more room to hike rates (generally negative for risk assets). This may particularly be the case if the participation rate, or the percentage of the population working or looking for work, stays low and wage growth remains elevated. The European unemployment rate, scheduled for Thursday, is expected to remain consistent with the prior level at 6.6%. China will release Purchasing Managers Index data this week.
Investors Seek Fed Policy Cues
Several members from the Fed are expected to speak throughout the week. Investors will look for more color around the central bank policy outlook following last week’s Jackson Hole conference. Investors are currently pricing in a roughly 65% chance of a 0.75% hike at the next meeting in September.
Source: Bloomberg for data, news developments and schedule of economic releases. Data as of August 28, 2022.
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