Weekly View - Taper-tighten split
Federal Reserve chair Jerome Powell delivered his much-anticipated virtual speech from Jackson Hole on Friday. The key takeaway message for markets was that the tapering of the Fed’s quantitative-easing (QE) policy remains separate from considerations about eventual rate hikes. The US dollar retreated as a result and markets turned more risk on, with the S&P 500 touching a new high. We are negative on the USD. Powell’s additional comments on continued long-term disinflationary forces and the reiteration of his conviction that the current inflation spike is transitory drove long-term yields slightly lower, despite the potential for QE tapering to begin before year end. US economic data continue to show healthy signs, with personal income up 1.1% in July. For further confirmation, we will be watching the US nonfarm payroll report on Friday as well as the employment component of US purchasing manager indexes and consumer confidence indicators.
The Bank of Korea raised its key rate by 25 basis points last week and expressed concern over financial stability risks (i.e., a debt-driven asset bubble), indicating it will likely continue hiking rates. This concern is not yet widely shared among the central bank community at large, but the longer inflation remains elevated, the more likely this concern will spread. In China, even as new regulations are being imposed on tech companies, Chinese tech stocks managed to rebound last week on the back of strong earnings and corporations’ charitable donations, the latter of which could be interpreted as attempting to ward off government pressure by helping local communities. We continue to prefer developed-market over emerging-market equities. Elsewhere, the Chinese Communist Party is attacking the widespread “996” workplace culture (working from 9:00am to 9:00pm, six days per week) and strongly urging companies to alleviate pressure on employees.
In Europe, the outlook of the German elections remains as undecisive as ever, with the SPD rising recently in polls. A three-party coalition looks likely, but with many potential party combinations. In France, Michel Barnier, the EU’s former Brexit negotiator, has declared his candidature for the 2022 presidential elections. The centre-right former minister wants to reunite what he considers a divided France. In the US, last week’s deaths of 13 US soldiers were another hit to president Biden’s approval rating at a crucial time as negotiations in Congress over his USD3.5 trn “Human Infrastructure Plan”, the debt ceiling and the 2022 budget loom large.