The time has come
César Pérez Ruiz, Chief Investment Officer, Pictet Wealth Management.
THE WEEK IN REVIEW
Federal Reserve Chair Jay Powell struck an unambiguously dovish tone in his Jackson Hole speech on Friday, making clear the Fed is ready to cut rates in September as the upside risks to inflation have diminished. The message delighted markets, with S&P500i rising 1.5% (in USD) on the week and the S&P SmallCap 600 Indexii up 3% (in USD) as the rally broadened. Treasury 2- and 10-year yields lost 15 and 8 bps respectively. The dollar was the week’s main victim, closing at 1.12 versus the euro. Helped by dollar weakness and safe-haven demand, gold hit record highs before closing at USD2,521. The dollar’s weakness hasmainly been against low yielding currencies rather than higher yielding ones like the Mexican peso, which has been hit by investor jitters over a planned judiciary reform. In politics, Kamala Harris, whohas raised over USD500 mn since entering the presidential race, accepted the Democrats’ nomination to run. Robert Kennedy Jr quit and endorsed Republican Donald Trump, which may make the race closer. In China, authorities suspended the system for approving new steel plants, responding to overcapacity and weak demand.
QUOTE OF THE WEEK
“The time has come for policy to adjust,” Powell said in Jackson Hole. “The direction of travel is clear, and the timing and pace of rate cuts will depend on incoming data, the evolving outlook, and the balance of risks.”
KEY DATA
The US Labor Department revised lowered its estimate for total payroll employment for the period from April 2023 to March 2024 by 818,000. The downward revision meant that monthly job gains during the period averaged roughly 174,000, compared tothe previously reported figure of 242,000. US new home sales rose 10.6% in July.
Euro area flash composite PMI rose to 51.2 in August from 50.2 in July, boosted by a French servicesupturn that coincided with the Olympic Games, with no manufacturing revival in sight. Euro area negotiated wage growth fell to 3.6% year-on-year in the second quarter vs 4.7% in the first quarter.
In Japan, the consumer price index rose by 2.8% year-on-year in July.
MARKET VIEW
This week we will watch the US core personal consumption expenditures (PCE) index, the Fed’s preferred inflation measure, for indications on the potential pace of its rate cuts, along with European inflation data. We expect the Fed to make three 25bps cuts this year, starting in September, and the European Central Bank to cut by 25 bps in September and December. In Europe, German industrial union IG Metall’s wage talks in September will be important aswage growth is a key indicator for the ECB to cut rates.
Results from a bellwether AI chip maker will be key this week, with the market watching for earnings guidance. Stock picking is more important than ever, as shown by the contrasting fortunes of two US retailers last week. News that a further US retailer sold its entire holding in a Chinese e-commerce business showed the decoupling between the US and China is happening at a corporate – as well as a political – level.
Israel’s air strikes in Lebanon on Sunday marked an escalation of hostilities. We are overweight gold given the current uncertain geopolitical environment. A bar of gold is now worth USD1 mn for the first time ever.
