Trends We're Tracking: Jackson Hole takeaways, transatlantic yields, China, and BRICS
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Jackson Hole takeaways amid weakening economic data
Federal Reserve Chair Jerome Powell stayed true to the Fed’s restrictive policy messaging with his Jackson Hole speech without giving much away on the path of future rate moves. The annual Economic Symposium is hosted by the Federal Reserve Bank of Kansas City in Jackson Hole, Wyoming and is closely followed by economists and investors for outlook and clues on the next steps for monetary policy. Those searching for a crystal-clear directive on rates and Fed outlook likely left disappointed. The battle against inflation carries on and the outlook remains largely data dependent. However, recent data in the week following Jackson Hole has highlighted more weakness than strength, marking a tougher job for the Fed.
The Federal Reserve is tasked with a dual mandate of price stability and maximum employment, or at this current time, seeking to reign in multi-decade high inflation while not crashing the economy. While inflation has cooled substantially this year, recently at 3.3% for PCE, the Fed’s preferred inflation gauge, off of its peak last summer of 7.0%, many fear it may remain above the Fed’s two-percent target or even resume a pivot higher. These concerns have led Powell and the Fed to stay vigilant with restrictive monetary policy. In his speech, Powell stated "Although inflation has moved down from its peak—a welcome development—it remains too high. We are prepared to raise rates further if appropriate and intend to hold policy at a restrictive level until we are confident that inflation is moving sustainably down toward our objective." Closing out, Powell echoed his comment from the prior year’s Jackson Hole, “We will keep at it until the job is done.”
At its July 25-26 meeting, the Federal Open Market Committee (FOMC) voted unanimously to raise the fed funds rate to a target range of 5.25%–5.50%, its tenth hike from near-zero rates in March 2022. There are three FOMC meetings left in 2023, in September, November, and December. While there will be much data out before those meetings, the most recent readings post-Jackson Hole speech have shown cracks in the economy. July job openings data dropped to their lowest level in two years. GDP growth in the second quarter was revised lower, from 2.4% to 2.1%. ADP employment data slowed sharply in August, with a print of 177K jobs compared with an estimate of 200K and a prior month total of 371K. Nonfarm payrolls for August were 187K, but the prior two months readings were revised sharply lower by a total of 110K, bringing the prior three months all under 200K and to the lowest three-month average since 2020. The unemployment rate also jumped unexpectedly to 3.8% from 3.5% as more job seekers entered the market without enough jobs created to support the entrants. Fed Funds futures following the Employment Report, are pricing in an under 10% likelihood of a Fed rate hike in September and a greater likelihood of no further rate hikes in 2023. This may change as more economic data rolls out, but for the time-being the Fed is in a difficult spot from its restrictive policy tone struck a Jackson Hole amid weakening economic data.1,2,3
Slowdown in China
China has yet to experience a booming economy that many thought would occur after they ended their zero-COVID policy nearly nine months ago. Instead, there has been weak growth and a stagnant economy that will likely impact global growth. Germany has already seen the results of weaking Chinese demand, as their economy has been lackluster over the past three quarters. The head of Australian mining company BHP sounded the alarms around the negligible impact of China stimulus efforts after the company reported its lowest profit levels in three years. Western countries had moved to divest from China and sales to the country account for single digit percentages for most, but a full-blown crisis within the Chinese real estate market would have significant impacts on global markets.4
Transatlantic yields trending upward
Government bond yields in the U.S. and Europe have trended up in recent months as resilient economic data, robust issuance, and hawkish central banks have pushed yields on benchmark 10-year notes to the highest levels in over a decade. Since the beginning of August, the yield on the U.S. 10-year Treasury note has consistently traded above the 4% level that it has rarely exceeded since the 2008-2009 Global Financial Crisis. Similarly, German and U.K. yields have recently hit levels not seen for over a decade. With the global economic outlook more uncertain than usual and central bankers determined to quash inflation, yields are likely to remain volatile.5
This month marked a dramatic turn of events, with the BRICS group of developing nations admitting Saudi Arabia, Iran, Ethiopia, Egypt, Argentina, and the United Arab Emirates to the union. This is BRICS first expansion in 13 years, and may mark the beginning of further expansion, as many other nations expressed interest in joining the BRICS ranks. This expansion indicates a desire by BRICS leaders to broaden the reach of the group’s economic impact in an effort to move to a more multipolar world, that is less U.S.-dollar-centric and structured on western policies. While the group’s nations account for 40% of the world's population and a quarter of global gross domestic product, it remains to be seen what role if any it will play on the global stage, as many worry that such a large group, consisting of countries with differing government structures, goals, and ideals will struggle to come to consensus.6
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