Markets
In its long awaited speech at the Jackson Hole Symposium, Chair Powell reiterated the Fed’s commitment to bring inflation back to the 2% target. Economic developments and the Fed’s policy have brought inflation down from peak levels, but prices rises remain too high. Powell didn’t bring any specifics on the cycle peak rate. But in a data dependent approach the Fed remains prepared to raise rates further if needed and intends to hold the policy rate at a restrictive level until it can be confident data inflation will settle near the target in a sustainable way. Goods inflation has fallen sharply and housing related inflation turned the corner. Core services inflation recently also show signs of easing, but the process develops slowly as it is affected by a tight labour market. There are signs of labour market normalization and of wage increases easing, but this process is incomplete. The Fed remains attentive that the economy may not be cooling as expected/needed. Powell didn’t elaborate on the topic of a potential higher neutral rate. Even as the Fed Chair didn’t give any specifics on what to expect for the September meeting, markets (correctly) understood the message as guardedly hawkish. The curve inverted slightly with the 2-y rising 5.6 bps and holding well above 5.0%. The 30-y declined marginally (-1.8 bps). German yields staged a catch-up move after the post-PMI Bund outperformance with yields rising between 7.7 bps (2-y) and 4.4 bps (30-y). ECB Chair Lagarde also didn’t give concrete guidance on the ECB’s intentions for the upcoming meeting. (US) investors felt comfortable with Powell’s ‘guidance’ that the Fed will proceed carefully when deciding on next steps (S&P 500 +0.67%). The dollar mostly closed slightly higher, but off the intraday peak levels (DXY close 104.07; EUR/USD 1.0796.). The yen still underperformed with USD/JPY almost exactly testing the YTD top of 146.62.
This morning, sentiment on Asian markets is constructive in the wake of Friday’s WS performance and measures from Chinese authorities to support market activity (cf infra). The eco calendar is thin today, but keep an eye at the sale of US 2 & 5-year notes. Later this week, interesting US data include consumer confidence and JOLTS job openings (Tuesday), ADP labour market report (Wednesday), the US PCE deflator (Thursday) and the payrolls and the manufacturing ISM on Friday. In EMU, German and EMU inflation data will take center stage (Thursday/Friday). We assume the downside in US and German yields to stay well protected going into Friday’s US payrolls. The dollar remains captured in a buy-on-dips pattern. A break of USD/JPY above 146.63 and/or DXY above 104.7 would further improve the picture for the US currency.
News and views
The Chinese Ministry of Finance reduced the stamp duty on stock trades for the first time since 2008. The levy will halve from 0.1% to 0.05% and is one of several measures to “invigorate capital markets and boost investor confidence”. The Chinese Securities Regulatory Commission also announced a slowdown in the pace of IPO’s while top stakeholders will be restricted to sell shares at firms whose stock prices have fallen below IPO levels or net asset levels. Another measure is to lower margin ratios for leveraged trades. Chinese stock markets outperform this morning, gaining up to 2%. Part of the optimism is tempered though by the 87% share price drop in Chinese property giant Evergrande after a 17-month trading halt. The defaulted developer is undergoing a debt restructuring process and this weekend reported a loss attributable to shareholders of 33bn yuan for H1 2023. They also delayed creditor meetings on its offshore debt restructuring proposal hours before they were planned (today). The yuan remains in dire straits, failing to leave the USD/CNY 7.30 area (matching 2022 top & weakest CNY since end 2007).
Rating agency Fitch on Friday affirmed the Czech Republic’s AA- rating with a negative outlook. The latter reflects a deterioration in public finances. Increased government spending on energy compensation measures and pensions is expected to increase this year’s budget deficit to 3.8% of GDP with lower than expected revenue from indirect taxes playing a role as well. The debt to GDP ratio is expected to increase marginally from 44.2% to 44.7% and remain near this level until 2027. Growth is projected to flatline this year and recover to 2.2% and 2.4% in 2024 and 2025.
