The week in markets 31 August 2020

“Virtual Jackson Hole” yields earlier-than-expected Fed framework review

• The annual Jackson Hole conference took place virtually on the last Thursday and Friday of August, with Fed Chair Powell unveiling the conclusion of the monetary policy framework review that had commenced in early 2019.

• Main innovation was the formal introduction of “average inflation targeting” whereby the Fed will look to engineer a moderate, but sustained, overshoot of inflation in the event that it has previously been running below 2% for some length of time, such that the long-term average is maintained at 2%. The symmetricity of the full employment aspect of the mandate was dropped, i.e. the Fed will loosen policy when unemployment is running above the natural rate, but not tighten it when unemployment is running below the natural rate.

• The tone of his comments was distinctly dovish, as expected by the market, and paves the way for further easing at the September FOMC meeting, more likely in the form of enhanced forward rate guidance than an expansion of asset purchases.

Mixed confidence reports

• The US Consumer Conference Board Confidence Index fell from 91.7pt to 84.8pt in August, worse than consensus forecasts (-93.0). This reflected declines in assessments of both current conditions and expectations for the coming months. The labour differential decreased by 5.9pts, with 3.7pt more people saying that jobs are difficult to get than those reporting jobs to be plentiful.

• The German Ifo business climate index rose by 2.2pt to 92.6 in August (consensus: 92.1). The increase over the month was driven by a much-improved assessment of current conditions (+3.4pt to 87.9), leaving the index at the highest level since late 2018. Manufacturing sentiment improved more than services over the month (+6.7pt and +5.7pt respectively), although both trade and manufacturing sentiment remain in negative territory. 

Equity markets produce some of the best August returns in living memory; USD resumes its descent

• The S&P 500 returned over 7% in August, driven primarily by Tech (with the Nasdaq Composite returning close to 10% over the month), although the lack of breadth was troubling (the S&P’s A/D line, which indicates the cumulative number of stocks advancing less stocks declining, was flat over the month).

• Global ex US returns were less impressive, although still comfortably in positive territory over the month. This despite the ongoing decline in the US dollar to more than 2-year lows and bear steepening of global yield curves, both of which should be supportive for non-US equities. Ultimately the idiosyncratic rally in US tech, specifically the “tera-caps”, is continuing to swamp the impact of the ongoing cyclical recovery on relative country, sector and style performance in equities.