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LGT Navigator: Powell brings stock markets back down to earth

August 29, 2022

At the highly anticipated speech at the central bank meeting in Jackson Hole, Federal Reserve Chairman Powell swore in the financial community to a sustained fight against inflation and held out the prospect of further, if necessary, hefty interest rate hikes. On Europe's stock exchanges and on Wall Street, Powell's statements caused heavy losses on Friday. In Asia, too, most of the stock markets are under heavy pressure at the start of the week. Meanwhile, in the bond market, the yield on ten-year US government bonds climbed to 3.12% and the US dollar pushed the euro to around 0.9920.

Powell brings stock markets back down to earth

“Restoring price stability will likely require the continuation of tight monetary policy for some time,” Federal Reserve Chairman Jerome Powell stressed at the annual symposium in Jackson Hole. Thus, it seems clear that the Fed may raise interest rates again "exceptionally sharply" on September 21. But the decision will depend “on the totality of the incoming data and the evolving outlook,” the top US central banker said. Historical experience, however, speaks against an early easing of monetary policy. Overall, the statements of Powell are to be considered as hawkish, but the Fed with the reference to the data situation also keeps a door open for a possibly soon more moderate pace. Hopes on the stock markets that the Federal Reserve could already shift down a gear after the first decline in inflation in the US have thus not come true, and Powell has thus brought the stock markets back down to earth. 

The Dow Jones Industrial closed Friday at 32,283.40 points -3.03% lower than the previous day and thus recorded a loss of -4.2% over the week. The S&P 500 fell before the weekend by -3.37% to 4,057.66 points and on the Nasdaq technology exchange, the indices fell by a good -4% - the largest daily loss in over nine years. In Asia, the stock indices joined most of the negative guidance from overseas. In Tokyo, the Nikkei 225 notes a minus of -2.6% at the start of the week and the South Korean Kospi falls by -2.25%. The Hang Seng Index in Hong Kong is down -0.7%. In mainland China, however, the losses were limited: the Shanghai Composite gives up about -0.15% and the Shenzhen Component loses about -0.4%. The broadest MSCI index for Asia-Pacific equities outside Japan falls at the beginning of the week by about -1.9%.

Modest recovery in US consumer sentiment

The mood of American private households has brightened again somewhat in August. According to the University of Michigan, the monthly consumer confidence index climbed from 51.5 points in July to 58.2 points, which was significantly better than the 55.5 points expected by analysts on average. In June, US consumer sentiment had hit a record low of 50.0 points. Meanwhile, US consumer spending and personal income rose less than expected in July. Consumer spending increased +0.1% month-on-month (consensus +0.5%) and incomes rose +0.2% (consensus +0.6%). On the other hand, the weakening of the PCE price index, which is based on consumer spending, is to be viewed positively, as it rose by +6.3% on an annual basis (previous month: +6.8%). The index is used by the Federal Reserve as a guide to inflation trends.

Pressure on ECB is mounting

On the sidelines of the central bank meeting in Jackson Hole, the Austrian central bank president and member of the Monetary Policy Council of the European Central Bank (ECB), Robert Holzmann, advocated a further sharp increase in the key interest rate. In his view, an interest rate step of 50 basis points is the minimum, and a more substantial increase of 75 basis points should be discussed at the next ECB Governing Council meeting on September 8. In view of the hawkish statements from the Fed head and further interest rate moves by the Fed, the ECB is likely to come under increased pressure to adopt a more aggressive pace in its interest rate turnaround.

Consumer climate in Germany falls to record low...

High inflation driven by energy costs is creating a poor mood among consumers in Germany. This is reflected in the latest edition of the consumer climate barometer published by Nuremberg-based market research institute GfK, which showed a record low value of minus 36.5 points for September. Compared with the previous month, the indicator fell by a further 5.6 points. According to GfK, many private households are putting aside part of their budgets for fear of an energy crisis, and the risk of a recession is considered high by consumers. The situation could worsen in the coming weeks and months, the institute commented.

...while consumer sentiment in France and Italy has improved slightly

Contrary to the development in Germany, consumer sentiment in France and Italy brightened slightly in August. The index of the French statistics office Insee improved from 80.0 to 82.0 points, after the indicator had previously fallen for seven months in a row. Economists had expected a further deterioration to 79 points. The focus remains on the massive increase in the cost of living. In Italy, the consumer confidence barometer climbed 3.5 points to 98.3 in August. Analysts had expected a decline to 92.5 points.

Economic Indicators August 30

MEZ Country Indicator Last period
08:00 GE Import Prices (July, y/y) +29.9%
09:00 SZ KOF Economic Indicator (August) +90.1
09:00 ESP Consumer Prices (August) +10.7%
11:00 EZ Economic Sentiment (August) +99.0
11:00 EZ Consumer Confidence (August) -24.9
14:00 GE Consumer Prices (August, y/y) +8.5%
15:00 US S&P/CaseShiller House Prices 20 biggest cities (June, y/y) +20.5%
16:00 US Consumer Confidence (August) +95.7


Earnings Calender August 30

Country Company Period
SZ Givaudan H1
GE DZ Bank H1
US Best Buy Q2
US Hewlett-Packard Q3


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