Christine Lagarde, president of the European Central Bank (ECB), from left, Kazuo Ueda, governor of the Bank of Japan (BOJ), and Jerome Powell, chairman of the US Federal Reserve, at the Jackson Hole economic symposium in Moran, Wyoming, US, on Friday, Aug. 25, 2023.
David Paul Morris | Bloomberg | Getty Images
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What you need to know today
A warning from Jackson Hole
Inflation “remains too high,” Federal Reserve Chair Jerome Powell said at the Fed’s annual retreat in Jackson Hole. So is economic growth — at least for the economy to hit a 2% inflation reading, a target that Powell insisted the Fed will not budge on. Interest rates, therefore, might continue going up and remain restrictive for longer, Powell warned.
Markets rebound
U.S. stocks rallied Friday, helping the S&P 500 and Nasdaq Composite snap a three-week losing streak. European markets closed slightly higher. Asia-Pacific markets started the final trading week of August on a high note. The Shanghai Composite jumped 2.3% as China halved its stamp duty — which previously stood at 0.1% — on stock trades.
Rise and fall
The Hong Kong stock market told two vastly different stories today. Shares of China Evergrande Group, the world’s most indebted property developer, plunged as much as 87% Monday as trading resumed after 17 months. On the flipside, shares of Chinese electric vehicle company Xpeng soared more than 13% after the company announced a $744 million deal with Didi, a Chinese ride-hailing company.
China’s grip on supply chains
China dominates the market in rare earth metals, which are key components in products like electric vehicle batteries. That makes U.S. supply chains vulnerable, U.S. Trade Representative Katherine Tai said in an exclusive interview with CNBC’s Martin Soong. Separately, U.S. Secretary of Commerce Gina Raimondo arrived in Beijing on Sunday, and is set to meet with senior Chinese officials.
[PRO] Eyes on PCE and jobs data
This week, look out for the Personal Consumption Expenditure report coming out Thursday, and the August jobs report releasing Friday. Those two pieces of data will give a sign of whether the Fed will indeed continue raising rates, as Powell cautioned at Jackson Hole, or if inflation and the jobs market are cooling down enough for the central bank to keep rates unchanged.
The bottom line
If Federal Reserve Chair Jerome Powell tires of tweaking interest rates, he has a promising career ahead as a modernist poet. Like the masters before him, Powell’s words dance in the space between two meanings — surely a result of his ability to satisfy a dual, but oftentimes contradictory mandate.
“We are prepared to raise rates further if appropriate, and intend to hold policy at a restrictive level,” Powell said, with my emphases added. On the surface, those remarks seem hawkish, a straightforward word of caution to markets: Higher rates! For a longer time! But that’s all they amount to: caution.
To put it another way, I can prepare and intend to have a salad for dinner if appropriate for my waistline. But if I see fried chicken, my salad plans are too easily dashed. Powell’s comments, then, say nothing, essentially.
To be fair, Powell admitted as much, saying that the Fed is “navigating by the stars under cloudy skies.”
If Powell is the poet, markets are the critics, reading against the grain. Despite the (ostensibly) hawkish tone of Powell’s Jackson Hole speech, markets, it seemed, seized on a tangential point and made it the whole narrative.
The quotation in question: “So far this year, GDP growth has come in above expectations and above its longer-run trend, and recent readings on consumer spending have been especially robust.”
Instead of dwelling on interest rate warnings, markets cheered the prognosis of a hotter-than-expected economy. The S&P 500 added 0.67% and the Nasdaq Composite gained 0.9%, giving both indexes their first winning week in four. Last week was also the Nasdaq’s best since mid-July. The Dow Jones Industrial Average advanced 0.7%, its best day since Aug. 7, but still suffered from a second consecutive losing week.
Markets applauding Powell’s speech may have been an unintended result — though we may never know what the speech’s aims were — since rising markets typically contributes to economic growth. That, in turn, keeps inflation and rates high.
The beauty of Powell’s words is that they are open to interpretation. The drawback of Powell’s words is that they are open to interpretation.
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