"I have nothing to offer but blood, toil, tears and sweat", Winston Churchill

At the end of last week, all eyes were on the Jackson Hole economic symposium, a meeting of central bankers held in the United States. The event has made a lasting impression, to say the least. Jerome Powell’s speech was the one the entire market was holding its breath for, and his comments were strong and determined. Fighting inflation in the US will ‘bring some pain to households and businesses. [...] But a failure to restore price stability would mean far greater pain. [...] Reducing inflation is likely to require a sustained period of below-trend growth. Moreover, there will very likely be some softening of labor market conditions’, he declared. He welcomed the recent fall in inflation, but said the Federal Open Market Committee would need to see more than just the improvement in July before letting its guard down. He reiterated that he was ready for ‘another unusually large increase’ at the next FOMC meeting on 21 September, after already two consecutive 75–basis point rate hikes. He also warned the markets that interest rates would move into restrictive territory and that the neutral rate bar, which reflects the ideal level, usually around 2.5%, for not overheating or slowing down the economy, was no longer relevant for the moment. These estimates of the neutral rate are not a ‘place to stop or pause’, he warned. The yield on two-year US Treasury bonds, which is particularly sensitive to expectations of rate changes, rose sharply and reached its highest level since the end of 2007 at 3.4804% on Monday morning, up from 3.36% before Mr Powell’s speech. To conclude with the Fed, it is worth noting that market expectations for the interest rate have been raised. Investors now expect the Fed to raise interest rates to 3.75% by next February, up from 3.30% earlier this month. This means a 75–basis point increase in September 2022 and three 25 basis point increases in November 2022, December 2022 and February 2023.

The dollar had a turbulent day in the wake of the press conference. Before Jerome Powell's speech, the dollar had fallen sharply against the euro following several disappointing economic data. The single currency had regained some ground from 0.9950 dollars per euro to almost 1.0100 but the European currency was to lose all the ground it had gained afterwards and fell to 0.9914 on Monday. Since then, the euro has recovered again as good news on German gas stocks supported the currency. German tanks have filled up at a steady pace in August and the target of 85% full by 1 November should be reached a month early. And while indicators continue to deteriorate in the eurozone, with the composite PMI falling to an 18-month low in August, reports from the ECB suggest that it too may raise its main interest rate more sharply than expected at its meeting on 8 September. The members of the European Central Bank’s Governing Council seem increasingly concerned that inflation is settling in at a high level according to the minutes of the July meeting published last week. Despite the risks of a recession, the institution is expected to raise rates again by 0.50%, or maybe even 0.75%, next month.

Although the Bank of England’s main policy rate is expected to rise significantly, traders are concerned that the pound will depreciate further. Soaring energy prices, soaring inflation and strong fears for the UK economy are putting pressure on the currency. The pound hit its lowest of the year yesterday at 1.1622 against the dollar despite expectations that the UK rate would be higher than the US rate. The market expects a return of 3.81% for the dollar next March and 4.15% for the pound.

WTI oil continues to rise from its mid-August low of $85.37 per barrel. The price is supported by recent comments from OPEC on a possible cut in production quotas as well as tensions in Libya which raise fears of a production cut. The risks of recession in the United States and Europe could lead to a drop in demand in these regions and oil-producing countries would like to anticipate a production surplus that could lead to a further drop in prices by reducing their production. The OPEC meets on 5 September and the oil price could continue to rise. A return to the $100 mark by then is not out of the question.

Unsurprisingly, stock markets ended sharply lower last Friday after the Jackson Hole summit. The Dow Jones fell by 1,000 points from 33,293 to 32,283 from the opening to the closing of the session and all 11 sectors of the S&P 500 ended lower, dragging the European markets down with them. Over the last 5 sessions, the US stock market has lost more than 3% and the European markets have lost around 2.80%.