Powell’s Jackson Hole speech was music to the ears of investors. Risk appetite increased, US equities up over 1%, Treasury yields fell, the USD was broadly weaker, and commodity prices rose

Fed Chair Powell’s Jackson Hole speech on Friday was much anticipated and his nod to commencing interest rate cuts from September and protecting the labour market were music to the ears of investors.  Risk appetite increased, with US equities up over 1%, Treasury yields fell led by the short end, the USD was broadly weaker and commodity currencies outperformed as commodity prices rose. The NZD ended the week just over 0.6230, its highest level since January and it was higher on all the key crosses. The new week begins with increased tension in the Middle East after Israel and Lebanon exchanged missile attacks.

There have been many occasions when the Fed Chair’s Jackson Hole speech has been market-moving and this was one of those occasions, justifying the anticipation all week in the lead-up.  While the speech contents were not surprising, it will be remembered for the time of Chair Powell giving the all-clear to begin the easing cycle and realigning the focus of monetary policy on the protection of the labour market rather than concern about inflation.  The key comments are worth repeating as written:

“The time has come for policy to adjust. 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.” And, “We do not seek or welcome further cooling in labour market conditions. Overall, the economy continues to grow at a solid pace. But the inflation and labour market data show an evolving situation. The upside risks to inflation have diminished. And the downside risks to employment have increased. We will do everything we can to support a strong labour market as we make further progress toward price stability”.

The market liked what it heard, the Fed’s increased confidence that inflation was beaten and now the focus being on avoiding a hard economic landing – the antithesis of the RBNZ’s policy mantra which set out to drive the economy into recession to beat inflation. 

US equities were higher, with broadly based gains, all sectors contributing to a 1.1% lift in the S&P500, while the Nasdaq index rose 1.5%.

US Treasury yields were lower, led by the short-end, with the 2-year rate closing the session down 9bps to 3.92% and the 10-year rate down 5bps to 3.80%. The Fed Funds market showed an increased chance of a larger 50bps cut to kick off the easing cycle in September, priced at 34bps, up from 31bps, and 103bps priced for the remaining three meetings, suggesting a jumbo 50bps cut thrown into the mix.  Analysts noted that the word “gradual” was missing from the speech.  Time-dependent forward guidance from central banks has been a past policy mistake and it makes much more sense to be guided by the data, as Powell revealed.  On that note, the next employment report due 6 September and following reports will be the key for the size of future rate cuts.

The USD DXY index fell a chunky 0.8% on Friday to 100.7, taking it just below the end-December 2023 low, with the levels just below 100 just over a year ago now looking like a key support level. Against the backdrop of higher risk appetite and higher commodity prices, the NZD and AUD outperformed, seeing the NZD up 1½% for the day to just over 0.6230, its highest level since January and breaking the key 0.6220 resistance level. We will need a few more trading days to determine whether that is a sustained break and, if so, then the December high just under 0.6370 comes into play.

The AUD met some resistance a tick below 0.68, as it did in July, while NZD/AUD was slightly higher at 0.9170. EUR and GBP made fresh highs for the year but NZD crosses were higher, at 0.4720 and 0.5570 respectively. BoE Governor Bailey, speaking at Jackson Hole, said it was too early to declare victory on inflation but the risks of persistent inflation appear to be receding and he largely repeated the policy message from the last meeting. JPY was also a strong performer, with USD/JPY down 1.3% to 144.40 while NZD/JPY closed the week at 90.

Supporting the yen, BoJ Governor Ueda played with a straight bat under grilling from lawmakers. He stuck to the script of the BoJ needing to adjust the degree of easing – central bank-speak for a further increase in the policy rate from a low level – and he played down the significance of the July rate hike on market turmoil, citing US economic data as a key catalyst. Earlier in the day, Japan CPI data showed the headline rate steady at 2.8% y/y against market expectations for a tick down, while the core measures were in line – the ex-fresh food measure ticking higher to 2.8% and the ex-fresh food and energy measure down 3 ticks to 1.9%.

In other news, Independent presidential candidate Robert F. Kennedy Jr. said he would suspend his election bid and endorse Trump, as the previous day’s media reports had indicated. Polls suggest this will help Trump’s chance of victory at the margin and this was reflected in betting markets at the end of last week.

The domestic rates market remained quiet on Friday, with no change in the 2-year swap rate at 3.87% and the 10-year rate up 3bps to 3.91%.  NZGB yields were up 1-2bps across the curve.  Retail sales data confirmed the dire conditions facing the sector, with real sales down 1.2% q/q, making it nine contractions out of the past ten quarters and adding to chance that Q2 GDP will be negative when reported, as widely expected. Real retail sales per capita are down a massive 13.7% from the peak over two years ago, making it a lot worse than the 10% contraction recorded during the global financial crisis.

During the weekend Middle East tensions rose a notch with Israel and Lebanon exchanging a volley of missiles against each other. The WSJ reports that the exchange was a significant show of force but initially appeared to result in few casualties and limited damage. Hezbollah said Sunday its operation for the day had concluded while Israel said its move was defensive, intended to pre-empt a Hezbollah attack. There is hope that tensions won’t be escalated any further.

In the day ahead there are only second-tier data releases, including Germany’s IFO survey, US durable goods orders and consumer confidence. In the week ahead the key economic releases will be euro area CPI, Canadian GDP and US PCE deflators at the end of the week. Nvidia’s earnings announcement mid-week is also a key event on the calendar.