Welcome to your weekly macroeconomic round-up, where we spotlight a few of the most significant events in the last week.
Jerome Powell's speech at Jackson Hole signals tapering before the end of the year but rate hikes will take time
Central bankers, policy makers and academics gathered in Jackson Hole last week for the annual economic symposium. As usual, investors’ main focus was on US Federal Reserve Chairman Jerome Powell’s speech for information on the future path of monetary policy in the US. Powell reiterated that there has been ‘substantial progress’ towards the central bank’s inflation objectives but highlighted that further progress towards the employment objective was needed before the Fed would start the process of ‘tapering’.
The market’s focus was on the rhetoric surrounding interest rate hikes, on which Powell communicated that investors shouldn’t assume that the timing and pace of tapering indicates when interest rates might be raised. Interest rate hikes require ‘maximum’ employment and an indication that inflation will at least meet the 2% target for some time. This essentially separates the two policy tightening tools that have been previously seen as sequential in nature and means that the pause before the first Fed rate hike might be longer than previously thought.
US PMI data indicate a sharp slowdown in private sector expansion
Data from the August survey of purchasing managers indicated that businesses became significantly less optimistic than they had been in July as the spread of the Delta variant and capacity constraints weighed on sentiment. The headline composite index fell from 59.9 to 55.4, an 8-month low, while services fell from 59.9 to 55.2 and manufacturing fell from 63.4 to 61.2. While a reading above 50 indicates an expansion in activity, the contraction in the pace of expansion is dramatic and is raising concerns over the longevity of the current economic cycle.
Survey results also indicate that input price inflation accelerated to the second fastest on record, with both manufacturers and services reporting increasing costs. Moreover, material shortages, difficulties hiring new staff and the spread of the Delta variant were all highlighted as contributing to capacity constraints that which led to a backlog of work during August.
Eurozone PMI present healthy expansion in activity coupled with a booming stock market
The August PMI for the eurozone moderated slightly from July but remained near 15-year highs, falling from 60.2 to 59.5. Both the constituent indices of manufacturing and services fell over the month, from 62.8 to 61.5 and 59.8 to 59.7 respectively.
Although the Delta variant is causing some concern amongst businesses, much as it has in the US, Europe has actually been experiencing a healthy rebound in hiring as firms boosted capacity to meet rising demand. However, there was more evidence that that firms’ costs and prices charged rose once again at some of the fastest rates seen in the last 20 years as demand outstripped supply.
The main event of the week was Jerome Powell’s speech at Jackson Hole , which was positively received by the market. The fact that rate hikes might be some way off led US Treasury yields back below 1.3%, while US equity markets made new record highs (measured by the S&P 500 index). The lower yields on US Treasuries also extended the recent outperformance of growth stocks compared to value stocks in the US.
Look out for next week’s update, where we’ll be focusing on Chinese PMIs and US non-farm payrolls.
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