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The Fed Heads Out West

Market Update

19.08.2024

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What happened last week?

US

  • US stock volatility fell and markets regained some of their previous losses.
  • A pair of indicators showed inflation continuing to ease in July, reassuring investors.
  • Investment big guns from Buffett to Burry revealed their latest intriguing stock plays.

Asia

  • China's economic woes stretched into the third quarter.

    Why It Matters

    The market’s mood swings took a chill pill, with the so-called fear gauge – the VIX – sliding back to its previously low levels after a weeklong spike. This cooling off, fuelled by better-than-expected US inflation and jobs data, reflects the market's belief that this month's tumult was more technical mischief than a deep-seated issue. That said, investor caution is still palpable: small-cap stocks were shining bright a few weeks ago, but in recent days, they’ve lost their newfound pep. This tilts away from those more economically sensitive companies suggesting a deepening unease about the big picture.

    Positive inflation news came in twos for the US, with both producer and consumer price index increases hitting their gentlest pace in months. This progress in the inflation battle hints at a coming pivot for the Fed, which might soon shift its focus from taming price rises to encouraging full employment. The good news is that with inflation close to target and the job market faltering, a first interest rate cut in September is almost assured. The bad news is that the market’s attention might soon turn to worries about the labour market – and what its weakness says about the health of the overall economy. Keep in mind: interest rate cuts can boost sentiment, but not if they herald a looming recession.

    Every quarter, the investment big guns – those packing portfolios worth over $100 million – are forced to show their cards in a quarterly “13F” filing. There were a few interesting moves in the recent reveal. Warren Buffett’s Berkshire Hathaway sliced its chunkiest holding, Apple, in half, and added a stake in Ulta Beauty – a move that plumped up the cosmetics chain’s shares by 12%. The Big Short-famous Michael Burry shrank the size of his portfolio, but beefed up his investment in Alibaba by 24%, making it by far his heftiest position, at 21%. The Bill Gates Foundation went 40% heavier into Berkshire (its top position after Microsoft), which now represents 21% of the overall portfolio. Bill Ackman’s Pershing Square bought some Nike.

    China's economic stumbles stretched into the third quarter, hinting that the government might need to approve another round of stimulus spending. Retail sales weren’t as bad as feared, but a sharp drop in fixed-asset investment and weaker industrial production painted a gloomier picture, suggesting that consumer and business confidence is on the decline. Adding to the concerns, China’s top steelmaker flagged an industry crisis that’s starker than during the downturns of 2008 and 2015, driven by the ongoing housing slump and shrinking factory activity.

    This week’s focus: The Fed Heads Out West

    In just a few days’ time, the market’s attention will shift to the remote town of Jackson Hole, Wyoming, as the Federal Reserve Bank of Kansas City throws open the doors on its annual three-day shindig. It’s the Glastonbury for the world’s economic movers and shakers – with central bankers, economists, and academics gathering to hash out the big issues, keeping a special focus, naturally, on interest rates and other monetary policy topics.

    The theme of this year’s hoedown cuts right to the central banking heart of things: "Reassessing the Effectiveness and Transmission of Monetary Policy". With the US economy remaining unexpectedly robust, even through the most aggressive rate-hiking cycle ever, it raises a couple of big questions. First, are old-school methods like interest rate adjustments starting to lose their punch? Second, given all the pandemic-era economic quirks, is it time to rethink the tools that central bankers have at their disposal?

    The answers to these questions aren’t likely to be simple ones. The conversations they spark could set the stage for changes that could eventually affect markets everywhere. Jackson Hole does have a history of serving up surprises. It's been the elk-dotted backdrop for some game-changing pivots, like in 2010 when former Federal Reserve (Fed) Chair Ben Bernanke began talking about more “quantitative easing”  bond buying to help speed the country’s economic recovery, or in 2020 when current Fed Chair Jerome Powell began talking about an “average inflation” targeting strategy. So, keep one eye on the mountain town in the week ahead, because it could bring another twist.

    What does seem certain is that Powell will give another reassuring tip of his Stetson to folks who are expecting a September interest rate cut, the country’s first since March 2020. After all, inflation fell closer to target last month, dipping below 3%, and the job market has shown modest signs of weakening – neatly aligning the economic stars for the kind of stimulus that lower rates can bring. Trouble is, investors are still jittery after a sharp market sell-off earlier this month and have begun craving a chunkier-than-usual cut. They’re increasingly betting that the Fed will lower rates by a half-percentage point – roughly double what was expected just a few weeks ago. That might have them saddled up for disappointment.

    The Week Ahead

    • On The Calendar

      • Monday: Earnings: Estée Lauder, Palo Alto Networks.
      • Tuesday: Earnings: Medtronic, XPeng.
      • Wednesday: Fed minutes. Earnings: Snowflake, Synopsis, Zoom.
      • Thursday: German manufacturing PMI (August), the Jackson Hole Economic Symposium begins. Earnings: Baidu, Intuit.
      • Friday: Japan inflation (July), the Fed chair speaks in Jackson Hole, Bank of Japan’s governor testifies to Japan’s parliament.

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