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LGT Navigator: Tense nerves ahead of Jackson Hole

August 24, 2022

The expectation that Federal Reserve Chairman Powell might emphasize at the central bank meeting in Jackson Hole that the fight against inflation has not yet been won and that a continued strict tightening of monetary policy must be pursued is causing selling pressure on the stock markets. Similarly, concerns are growing that interest rate hikes could inevitably lead the world's largest economy into recession. This is evidenced by the markedly dampened mood among consumers and companies, as confirmed by the latest purchasing managers' survey data.

Tense nerves ahead of Jackson Hole

On the New York Stock Exchange, weak economic data, and "hawkish" statements from the top of the Federal Reserve weighed on prices. Minneapolis Fed President Neel Kashkari had reiterated that inflation could only be brought under control by further monetary tightening and underestimated the persistence of price pressures. After a positive start, the Dow Jones Industrial turned negative and closed -0.47% lower than the previous day at 32,909.59 points. The broad S&P 500 went out of trading at 4,128.73 points (-0.22%). On the Nasdaq, the indices were able to hold and closed almost unchanged from the previous day. Meanwhile, in the bond market, the yield of ten-year US government bonds climbed to 3.06%.

In Asia, the stock markets tended to midweek inconsistent. Under pressure were particularly the markets on the Chinese mainland. Thus, the Shenzhen Component fell by -2.3% and in Shanghai, the Composite Index loses -1.4%. In Hong Kong, the Hang Seng Index trades shortly before the close of trading around -1.2% lower and the Hang Seng Tech Index loses around -2.4%. In Tokyo, the Nikkei 225 had to give up early gains and trades around -0.4% lower than the previous day.

Given these omens, Europe's stock markets are likely to open negative on Wednesday. Meanwhile, the euro was able to stabilize somewhat thanks to weak US data, after the common currency had fallen to a 20-year low against the US dollar just above 0.99. The background to this is, on the one hand, the interest rate differential, which is widening in favor of the greenback, and the negative economic outlook for Europe in view of the feared worsening of the energy crisis. The euro also touched a new low against the Swiss franc.

Activity in the US private sector cools noticeably

In the US, the economic trend seems to have weakened surprisingly significantly in August. This was indicated by S&P Global's Purchasing Managers' Index (PMI) on developments in the services and industrial sectors of the world's largest economy. The PMI Composite fell from 47.7 points in July to 45.0 points in August, marking the second consecutive decline and the lowest level since May 2020. The services sector in particular performed worse in August, where companies suffered from the decline in consumer spending against the backdrop of high inflation and rising interest rates.

Business sentiment in the euro area at its lowest level in 18 months

According to the latest survey results among purchasing managers, the outlook for the euro economy has deteriorated further. The S&P Global purchasing managers' index fell from 49.9 points in July to 49.2 points in August (consensus expectation 49.0). The leading indicator thus reached its lowest level in one and a half years and fell below the growth threshold of 50 points for the second month in a row. The PMI for the service sector now stands at 50.2 and the industrial PMI at 49.7 points. Weighing on the economy is high inflation, which is causing weaker demand in the services sector in particular, S&P Global commented. For its part, the industrial sector lamented fewer orders for the third consecutive month.

According to Ifo, inflation is dragging down Germans' recent savings

Savings accumulated during the pandemic and the restrictions have now been eaten up again, according to Munich-based economic research institute Ifo. German households parked around EUR 70 billion more in bank accounts between April 2020 and March 2021 than in normal years, Ifo analyzed. However, as the banks' balance sheets now show, consumers have increasingly drawn on these savings since the end of last year and the excess deposits had been almost eliminated by the end of the first quarter of 2022, it said. In the second quarter, this development had continued at an almost unchanged pace. Due to high inflation, Ifo expects private consumption to cease to be an economic driver in Germany in the further course of the year.

Economic Indicators August 24

MEZ Country Indicator Last period
14:30 US Durable Goods Orders (July, m/m) +2.0%
16:00 US Pending Home Sales (July, m/m) -8.6%

 

Earnings Calender August 24

Country Company Period
USA Nvidia Q2

 

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Imprint
Publisher: LGT Bank (Switzerland) Ltd., Glärnischstrasse 36, CH-8027 Zurich
Editor: Alessandro Fezzi, E-Mail: lgt.navigator@lgt.com
Source: LGT Bank (Switzerland) Ltd.

 

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