Equities Climb Despite Jackson Hole’s Higher for Longer Warning
2023.08.28 06:53
- Rate hike odds edge up after Powell and Lagarde signal inflation fight not over
- But dollar steady as yields barely budge, Wall Street closes higher
- China announces more stimulus, stocks jump before paring gains
Powell strikes a balanced tone
Markets were still digesting Powell’s Jackson Hole speech on Monday amid a mixture of relief and trepidation after the Fed chief struck a mostly balanced tone on the rate outlook with a slightly hawkish tint. As had been widely anticipated, Powell’s address on Friday at this year’s annual Jackson Hole symposium did not deliver a major policy announcement as was the case last year, but neither was it what investors had been hoping for.
Powell’s speech in 2022 spurred a powerful rally in Treasury yields after he doubled down on the Fed’s determination to bring inflation down, even if that came at the expense of economic growth. With inflation having since come down to about 3%, the focus this year had been on the long-awaited signal that the Fed is done hiking rates.
That message did not come, and Powell clearly left the door open to further rate increases. However, there was some relief as he also indicated policymakers will “proceed carefully” when deciding about further tightening.
Looking past the headlines, perhaps the main message from this year’s Jackson Hole was that the Fed simply doesn’t know how much tightening is still needed and is as much in the dark about what will happen to inflation as everyone is.
Stocks unrattled by Powell’s hawkish lean
For many investors, however, the lack of commitment to additional tightening was just another sign that the July hike was the last and the next move will be down. This cheered equity markets and the S&P 500 closed up 0.7%, with Wall Street futures extending their gains today.
Nevertheless, the odds for one final 25-basis-point rate rise did creep up after Powell’s remarks and markets see around a 65% probability of such a move by November. Expectations for rate cuts in 2024 were also pared back slightly. But in bond markets, only the two-year yield scaled a fresh high, briefly brushing 5.10% today before falling back.
The fact that long-term yields didn’t react much suggests investors are confident the Fed has a handle on inflation and this can only be good news for equities.
China stock rally fizzles out after policy boost
There was a further lift for stocks on Monday from new policy announcements in China for boosting the flagging economy. It’s become a well familiar pattern lately that every time there is some poor economic data, it’s swiftly followed by new support measures.
Today’s disappointing release was the drop in industrial profits, which recorded the 12th straight month of year-over-year declines in July. Beijing’s latest stimulus attempts include a halving of the stamp duty on stock trading and the launch of 37 new retail funds, both of which are aimed at reviving the stock market. There was also a separate announcement on constructing more affordable housing.
China’s main indices soared by around 5% on the headlines but soon retreated to close up about 1.1%, in a sign that policymakers still have some way to go in convincing markets that these incremental measures will be enough to kickstart growth.
The Australian dollar also eased from intra-day highs. Investors will be keeping an eye on Chinese PMI numbers due on Thursday.
Euro finds support in hawkish Lagarde
Elsewhere, the euro was steady around $1.08, finding support in ECB President Christine Lagarde’s somewhat hawkish comments when she spoke at Jackson Hole on Friday. Although investors remain undecided about whether or not the ECB will hike rates in September, Lagarde’s tone suggests another hike could be in the pipeline as she warned about the risk of elevated inflation becoming more persistent due to higher wages.
The pound on the other hand stayed stuck near 2½-month lows below $1.26 despite the Bank of England’s deputy governor Ben Broadbent telling the Jackson Hole audience on Saturday that restrictive policy may last “for some time yet”.
Bank of Japan Governor Kazuo Ueda was also in attendance where he repeated his usual dovish message of easy policy. The yen was trading slightly weaker on Monday.
