The Jackson Hole Symposium kicked-off yesterday with the update from the Federal Reserve chair Jerome Powell.
The US central banker revealed plans to adjust the inflation policy to an average target of 2%, as opposed to a fixed target of 2%. The news didn’t come as a shock but it was an interesting development all the same.
As a reaction to the pandemic, the Fed pursued an extremely aggressive stimulus package as a way of trying to cushion the blow of the lockdowns. Central banks around the globe all took the decision to go down the easing route in a bid to assist their respective economies. At the time of the interest rate cuts and the various government bond buying schemes were announced, some economists cautioned there could be a spike in inflation.
The reopening of economies was a factor in the recovery in oil and metal prices and until recently, there wasn’t much evidence of inflation pressure in the US. The July CPI reading came in at 1%, which was a big jump from the 0.6% posted in June. Even the core reading, which strips out commodity prices, jumped from 1.2% to 1.6%. The reports pointed to a rise in demand.
The Fed’s preferred measure of inflation is the core PCE metric – it is due out today at 1.30pm (UK time) - and economists are expecting it to increase from 0.9% in June to 1.2% in July. Yesterday, Mr Powell said the Fed would allow inflation to run over 2% for ‘some time’. The lack of a timeframe suggests the bank wants to give themselves some wiggle room. Some people were afraid that a very loose monetary policy would spark a jump in inflation, and that might prompt the Fed to tighten policy, to try and get inflation under control. Now the central bank have basically said we are happy to maintain a very loose monetary policy even if the cost of living rises. It is worth noting, that core PCE has not hit 2% since September 2018.
Equity markets were choppy on the back of the update from Mr Powell. The FTSE 100, the DAX 30 and the CAC 40 finished down 0.75%, 0.71% and 0.64% respectively. The US indices were volatile. The S&P 500 and the NASDAQ 100 set new record high in the early part of the trading session. There was a period when the benchmarks were in the red, but the Dow Jones and the S&P 500 closed higher, while the NASDAQ 100 finished lower.
The VIX, which is often referred to as the fear index, jumped to its highest level in over three weeks.
Equity markets in the Far East are showing modest gains and European indices are being called higher.
Volatility was seen in the US dollar too. Within an hour of the new inflation target being announced, the greenback hit session highs. Things tapered off from there and by the end of the session it was largely flat on the day. Just over a week ago, the dollar fell to a 27 month low and even though it has recovered a little, it hasn’t shaken off the wider negative trend.
The aggressive move in the dollar prompted volatility in gold – the inverse relationship between the two markets hit the commodity. The yellow metal was under pressure when the dollar was moving higher, but as the dollar’s gains faded, there was a small recovery in gold – but it still ended in the red.
Tropical storm Laura hit the coastline of Louisiana yesterday and it appears to have by-passed oil infrastructure. Earlier in the week, WTI and Brent crude pushed higher as oil workers in the Gulf of Mexico were evacuated, so that put pressure on prices. The oil market handed back some of those gains as it turns of the disruption to the energy sector wasn’t as bad as initially predicted.
At 7am (UK time), the German GfK consumer confidence report will be posted and it is tipped to be 1.2, which would be an improvement on the -0.3 registered in July.
The final reading of French GDP for the second quarter, on a quarterly basis, is expected to be -13.8%, unchanged from the initial report. The preliminary measure of French CPI for August is anticipated to be 0.2%, which would be a big fall from the 0.9% registered in July. The updates will be announced at 7.45am (UK time).
US personal income and expenditure for July are expected to be -0.2% and 1.5% respectively. Economists are expecting the core PCE to be 1.2%. The announcements will be revealed at 1.30pm (UK time).
Canada’s monthly GDP report for June is tipped to be 5.6%. Keep in mind the April reading was 4.5%. It will be posted at 1.30pm (UK time).
Andrew Bailey, the governor of the Bank of England, is due to speak at 2.05pm (UK time).
The Chicago PMI for August is expected to be 52, and the final reading of the University of Michigan consumer sentiment is tipped to be 72.8. The updates will be posted at 2.45pm (UK time) and 3pm (UK time) respectively.
EUR/USD – has been in an uptrend since April and if the bullish run continues it should target 1.2000. A pullback might find support at 1.1696 or at the 1.1600 zone.
GBP/USD – while it holds above the 1.3000 mark, the bullish trend that has been in place since late June should continue, and it might target 1.3284 or 1.3515. A move back below 1.3000, could see it target the 1.2800 zone.
EUR/GBP – since late July it has been pushing lower and a break below 0.8930 should put 0.8864 on the radar. A rally might run into resistance at 0.9069.
USD/JPY – while it holds below the 100-day moving average at 107.01, the broader bearish move is likely to remain intact. A move through 106.00 could see it target 105.10. A break above 107.01, should bring 108.00, the 200-day moving average, into sight.