Weekly house view | Waiting for Jay

The Federal Reserve’s Jackson Hole gathering is the big event this week for markets, which are grappling with the implications of a resilient US economy. Fed Chair Jay Powell’s speech on Friday will be in focus for any guidance on the outlook for interest rates, the state of the economy, and inflationary pressures. July retail sales data last week was stronger than expected, the Federal Reserve Bank of Philadelphia’s manufacturing index showed a rebound in August, and initial jobless claims fell 11,000 in the week ended August 12. The data came as minutes from the Fed’s July meeting showed “most participants continued to see significant upside risks to inflation”. The upshot is that the September policy meeting will be a close call. Thus, bond yields moved higher. The repricing of expectations was mostly seen in the long end of the curve, which had a negative effect on highly valued tech names and small caps. We are overweight USD investment grade debt. In the UK, inflation and wages are sticky. Headline inflation declined to 6.8% in July from 7.9% in June, but core inflation was unchanged at 6.9%. The Bank of England will thus likely tighten rates by another 25 basis points in September to 5.5%. 

China is on a totally different trajectory with weak economic data and trouble in the wealth-management sector, marked by some missed payments on products linked to real estate. The risk is that consumer sentiment worsens further as households have invested in such saving products. We are watching for any more accidents. The government suspended publishing data on youth unemployment, which hit a record high of 21.3% in June. Faced with the weak data, the People’s Bank of China, or PBoC, unexpectedly cut key policy rates for the second time in three months, though it left the mortgage-linked five-year rate unchanged. As China’s property woes continue and consumers retrench, the economy will require some fiscal support as the loss of confidence cannot be addressed simply through lower financing costs. By contrast, Japan, which was in deflation a few years ago, enjoyed 6% annualised growth in the second quarter. In a positive for the Bank of Japan, core inflation eased to 3.1% in July from 3.3% a month earlier. We like Japanese equities.

In markets, the robust US data was negative for both bonds and equities as investors faced up to the prospect of interest rates staying higher for longer. Global equities suffered a third consecutive weekly decline, with Chinese equities particularly weak. Below the surface, this looks like a rotation rather than a big correction. This week, Q2 earnings from a bellwether for AI will be crucial for tech sentiment. Europe heads into the week with a new winner of the soccer Women’s World Cup after Spain beat England on Sunday.