LAWRIE WILLIAMS: A week dominated by Powell’s Jackson Hole speech - UPDATED

What a difference a day makes in the markets.  Before Fed chair Jerome Powell got up to make his much-anticipated presentation at the Kansas City Fed’s Jackson Hole economic symposium on Friday, the markets had been having a pretty mundane week.  Equities, bitcoin and precious metals had all been moving up and down, not very significantly, with commentators’ views fairly finely balanced as to what the markets were likely to do between now and the September FOMC meeting, which was still over three weeks hence.  The Fedwatch Tool, which tries to assess the markets’ opinions of what kind of rate increases would be imposed by the Fed at the FOMC meeting, was pretty finely balanced between expectations of a 50 basis point (1/2%) increase or a 75 basis point (3/4%) rise, despite some important data releases which might have moved the markets at other times.

And then Powell spoke.  Expectations had probably been that the speech would be pretty non committal on Fed forward policy, and in any case require interpretation by the various analysts of any obscure nuances as is usual with Powell’s presentations.  In the event the address was short and to the point and a degree of market mayhem ensued.

Powell’s delivery was expected to be on the hawkish side, which indeed it was.  Even so, some commentators had been hoping for the possibility being expressed of a Fed pivot to lower interest rate impositions, given what was seen as a weakening U.S. economy and huge U.S. debt levels which higher rates would make more difficult to service. 

In the event Powell’s presentation was perhaps even more hawkish than anticipated.  Any immediate hopes of a Fed pivot seemed to be dashed and the message was very much that the Fed was going to do what it takes to try and bring inflation down to the expressed, perhaps over-ambitious, 2% target.  This would require a continuing strongly aggressive approach to interest rate rises and, as a result, the Fedwatch Tool has moved 66.5:33.5 in favour of the 75 basis point rate rise at September’s FOMC meeting.  Indeed there was even a suggestion that an even bigger full 1% rise might be considered.  

That even a 75 basis point rate rise would increase the likelihood of a stock market downturn and a definite move into recession, seemed not to be a worry for the Powell-led Fed.  Indeed a cynic may well come to the conclusion that the Fed might welcome a period of recession as a key tool in helping reduce inflationary pressures, although don’t expect such an admission.

Apart from the above-mentioned move in the Fedwatch Tool, virtually all asset classes plunged on the interpretation of Powell’s speech.  Bitcoin and equities fell the most (by more than 3%), but precious metals dived too, along with a rise in the dollar index.  While gold remains traditionally a good inflation hedge, it can also be vulnerable to higher interest rates.  It should in this case recover more quickly than equities, though, with the latter facing ongoing profit slumps as long as a recession is in place.  Those companies reliant on continuing cash infusions and ongoing loans will struggle in particular as these become more expensive and more difficult to come by.  As a recession bites discretionary income also falls and purchasing diminishes which makes companies reliant on retail sales more prone to cashflow problems.

Table:  Price/Index movements Jan 2 2022 – Aug 29 2022

Source: Yahoo Finance, Bullionvault.com

As further data emerges confirming that the U.S. is at least heading for recession, if it is not already in one, equities in particular could well suffer further falls.  The Dow Jones Industrial Average is currently down nearly 12% since the beginning of the year and the S&P 500 15% and the NASDAQ 23%.  By contrast, the gold price, although it fell back quite sharply on Friday, is only down a little under 4% in U.S. dollar terms and is actually higher in many other major currencies.  In other words, although it has been showing signs of weakness it has still served as a good wealth protector under a slew of adverse circumstances. With much of the world seemingly bound for recession.  We still think there’s a good chance for a gold price recovery before the year end, but probably not one for equities unless the Fed does pivot, which at the moment seems unlikely.

27 Aug 2022 | Categories: Gold, Dollar, US, FOMC, Bitcoin, inflation

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