Jackson Hole reassures the markets

The annual central bankers’ symposium hosted by the Kansas City Fed took place last weekend from Friday to Sunday. Because of the pandemic, the event was held virtually and not in Jackson Hole, Wyoming as usual. The last Fed minutes released before that, on 18 August, had hinted at a possible tapering this year, and not from March 2022 as expected at the time. As a result, stock markets saw a wave of profit-taking and the dollar appreciated, thus pushing the euro-dollar parity below 1.17 on 20 August. With the Fed members divided on tapering, Jerome Powell’s speech last Friday was much awaited as it would clarify whether he favoured a quick end to measures to support economic support or a more moderate approach. Unsurprisingly, he struck an extremely prudent to. On the job market, which serves to guide US monetary policy, Mr Powell pointed to “favourable conditions” but that there was still “considerable remaining ground” to be covered to reach maximum employment. On inflation, he once again attributed the current price increases to transitory factors and explained that tightening policy in response to such temporary factors could end up being counter-productive when the effects of such tightening came when they were no longer needed. Regarding the economic outlook, while it remains favourable, new variants of the coronavirus could weigh on recovery. Although Mr Powell is among the majority of Fed members who contemplate reducing asset purchases this year, his speech was dovish, and lacked a definite timeline for monetary tightening. Mr Powell also made clear that investors should not see the timing and pace of the reduction in asset purchases as carrying a direct signal regarding the timing of interest rate hikes.

Mr Powell’s speech reassured stock markets, and Wall Street ended the week with gains overall. The S&P 500 has set a 52nd closing record this year. In fact, the succession of records is a record in itself! The dollar retreated, trading at 1.1856 against the euro and 0.9102 against the Swiss franc, before going back to its pre–Jackson Hole level. Metals profited from this retreat: gold remains above $1,800 and silver touched $24 again. Aluminium reached its highest price in ten years ($2,726.50/tonne) As the world economy recovers, demand for this metal – used in construction, autos, soda cans, etc. – is very strong. At the same time, there are significant supply-side obstacles in Russia and China. Aluminium production is an energy-intensive and polluting activity, and China has recently had to scramble to ensure its energy supply. Beijing is also currently seeking to regulate to its polluting industries to try and control unchecked pollution. In Russia, the government has levied temporary tax on non-ferrous metal exports, in the hopes that the revenue will set off the rise in commodity prices.

Hurricane Ida forced the shut-down and evacuation of numerous oil facilities in the Gulf of Mexico, thus cutting production in the area by 95%. Refineries were also shut down in Louisiana, but initial assessments point to only limited damage. The price of the WTI barrel was therefore not impacted. It ended the month slightly down at $68.50, its first decrease since March. Still, it is only $8 from its peak on 5 July.

In Europe, certain members of the ECB have begun to speak of gradually decreasing monetary programme intended to support economic growth. And just like in America, changes in asset purchases should not be seen as indicative of coming rate hikes. Inflation in the eurozone was revised upward for the month of August, above the market consensus. It currently stands at 3% on an annualised basis, above the ECB’s 2% target.

In Switzerland, the KOF Economic Barometer fell for the third month in a row to 113.5 points in August. This is down from 129.8 points at the May peak and reflects fears of a fourth COVID-19 wave that could hamper the economic recovery, says the Zurich-based KOF Swiss Economic Institute. Sight deposits with the SNB saw a very slight increase (by CHF 200 million), which means the Swiss central bank has not needed to intervene massively in the currency market to weaken the Swiss franc (which is again trading above 1.08 against the euro).

In South Korea, inflation is now expected to reach 2.1%, up from 1.8% previously. The central bank has decided to increase its benchmark rate by a quarter point to 0.75% and is not ruling out a further hike. In doing so, it has become the first Asian central bank to tighten its monetary policy.

Lastly, in Canada, GDP fell against all expectations in the second quarter (-1.1%). The market consensus was for a 2.5% increase. It will be interesting to see whether the central bank decides to reduce asset purchases anyway. This figure comes amidst a close electoral race between the conservatives and Justin Trudeau’s liberals. Even the context of such uncertainty, however, the Canadian dollar has remained stable, trading at around 1.26 against the dollar.

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