As the summer draws to a close and people prepare to resume work and school, investors turn their attention to the aftermath of the world’s most important gathering of central bankers – the Jackson Hole symposium in Wyoming.
This year’s event ran from 24 to 26 August and was an opportunity for policymakers to outline their broad policy shifts after a period that has seen persistent inflation and aggressive interest-rate hikes in the US, the UK and Europe. In previous years, the Federal Reserve Bank chairman has usually created a buzz and set the tone for the markets. That was certainly the case in 2022: Jerome Powell delivered a short but determined speech setting out the bank’s unswerving commitment to defeating inflation – even if it meant slower growth and a painful period for US households.
That message dashed any hopes of a swift end to Fed interest-rate hikes, driving stocks and bonds lower in the months that followed. One year on, Powell’s stance is still hawkish: his speech was steeped in the same determination but was more balanced. He stressed that any shifts regarding future hikes or any interest-rate cuts would be data-dependent. At no time did he suggest that any significant shifts in sentiment might be in the offing. Indeed, the door is still wide open to further actions either way.
Throughout August and the lead-up to the symposium, the markets followed their usual seasonal pattern: wariness in relation to uncertain times. Individual stock markets performed poorly over the month: indeed the MSCI World Index is down by just shy of 3% (in sterling terms) over the four-week period. Historically, corrections have involved falls of between 8% and 10% on average. Since September is renowned for being one of the worst months in the year for stocks, traders might be feeling some anxiety as they return from their summer breaks.
There were three major takeaways from this year’s Jackson Hole Symposium. Firstly, Powell has ended any speculation that the Fed might tolerate ongoing inflation or even raise its inflation target. The current 2% target will remain in place, and while Powell did acknowledge that things had recently been moving in the right direction, he does not intend to make any changes to current monetary policy. “This is only the beginning of what it will take”, he said.
Secondly, officials are determined to maintain pressure: the Fed is prepared to raise interest rates further if necessary. Rates will therefore remain higher for longer if the data warrants it.
Thirdly, Powell let it be known that the Fed would tread carefully in relation to any future rate hikes. At the same time, he also appeared to suggest that the economy’s current resilience would preclude the need for any further tightening.
Regarding growth, the US consumer still hasn’t capitulated. That said, credit conditions continue to tighten and job gains are gradually slowing. So since the Fed’s monetary policy tends to react to evolutions in consumer trends and the job numbers, things could easily change from one day to the next. Indeed, last week’s Purchasing Managers’ Index data showed significantly lower momentum in US and European business activity.
Johannesburg saw another significant event this week: the BRICS summit, attended by Chinese, Brazilian, South African and Indian heads of state… while Russia was represented by its Foreign Minister. Billed by some as a bloc to rival the G7, this summit revealed the numerous differences across the member states – too many for them to be considered a consolidated voice on the wider global stage.
South African President Cyril Ramaphosa announced that Argentina, Egypt, Ethiopia, Iran, Saudi Arabia, and the United Arab Emirates had been invited to join the bloc. These six will be fast-tracked into the consortium, while 69 countries have been invited to attend this year’s gathering. China and Russia appeared most keen to broaden membership, while the other three feared that doing so might dilute some of the bloc’s influence.
The BRICS countries currently account for 40% of the world’s population, and the bloc is seen by many as the voice of the emerging world. The expanded group would account for approximately 37% of global GDP.
A contentious issue might be the inclusion of countries associated with OPEC+: there are questions over whether or not the bloc wants to get dragged into the politics around oil supply. The addition of large oil producers (including Saudi Arabia) to the group will obviously raise concerns for the US. At a time when the world is increasingly divided into two distinct blocs, defined global political roles for such countries might create further tensions.
Countries such as India, South Africa and other potential members are keen to maintain political and economic ties with the world’s developed countries. They are more likely to see any actions on the part of the BRICS countries as a means of improving relations between the developed and developing world. Hostilities among certain countries are currently impacting air routes from West to East. Meanwhile, increasing restrictions on technology trade are creating demand-over-supply issues. And crucial minerals for new electrical products that will be needed in a non-fossil fuel world are now subject to bottlenecks.
As summer shifts into autumn, it is worth noting that 2023 has so far been quite different to 2022. Falling inflation, resilient economic growth, improving corporate earnings and lower volatility all mean that we are now on a much firmer footing. Fundamentally, the world’s central banks are still hawkish, but the message they are putting out is gradually changing, creating a more favourable backdrop for equities and bonds. That said, the world is still in the grips of inflation.
In the absence of any Fed pivot to any imminent rate cuts, valuations might be under some pressure to expand significantly further over the short term. So any further uptrend and the pace of global equity market gains might be a tad slower – September and October tend to be characterised by greater levels of volatility. But equities tend to do well over the following months and the run-up to Christmas and the New Year.
So be patient and well-disciplined over the forthcoming months. Nobody is saying that this month’s pullback has been anything other than disappointing. And there is every likelihood that September might bring yet more frustration. However, such weakness in the stock market invariably represents an opportunity. The potential for low inflation, interest rates and bond yields next year should help further establish the bull market that began in October 2022 as it rallies further.
