Summer’s almost gone. The late August bank holiday weekend is always a good time to reflect on what has happened in finance and economics through the summer, and more important, figure out what’s to come.
I think that’s why the annual symposium of central bankers in Jackson Hole, Wyoming, invariably takes on an outsized significance.
Central bankers are supposed to know about these things, so the meeting focuses attention on what they think might happen to the major economies, to exchange rates and to interest rates into 2025.
Shifting? On Friday Powell was sufficiently upbeat to give the markets the boost they had hoped for
Inevitably, the banker that matters most is the chair of the Federal Reserve, Jerome Powell.
While this year other central banks, including the Bank of England and the European Central Bank, have cut rates while the Fed has yet to move, the Fed sets the overall direction.
On Friday Powell was sufficiently upbeat to give the markets the boost they had hoped for.
The certainty of a September cut in rates pushed the yield on treasury notes down, boosted share prices, and pushed the sterling/dollar rate up to $1.32, the highest since early 2022.
But while words matter, they are only words. The timing of the first cut in rates is of huge importance to the financial markets, but what happens in the autumn and beyond will be determined by the two elements in the Fed mandate: the pursuit of maximum employment and stable prices.
Alas, they are often in conflict with each other. In the short-term at least, lower interest rates lead to more jobs, while higher rates curb inflation.
So far this year job growth has remained strong in the US and elsewhere – including the UK. Inflation has come down too in most developed countries, but threatens to rise later this year and maybe beyond.
So the best way to characterise the mood now is to acknowledge that the emergency is past, but be aware of the scale of the slog that lies ahead. As far as inflation is concerned, if pay growth everywhere continues to remain solid, then that slog will be a tough one.
And while growth and jobs have been more positive than the forecasts at the end of last year – much more so in the case of the UK – the fears of a US recession remain.
What might this mean for investors peering into the autumn?
Highs and lows: The harsh truth is that the S&P 500 is up nearly 19% this year while the FTSE 100 is up less than 8%
For fixed interest securities, it has been a bumpy year. Jay Powell’s speech pushed the yield on 10-year US treasury notes down to 3.8 per cent, way down on the 4.7 per cent peak in the spring.
But they were below 3.8 per cent at the end of December, so there has been no overall decline.
We have made even less progress. The 10-year gilt yield dipped below 3.5 per cent at the end of last year. It spent most of the spring and summer above 4 per cent and even now it is 3.9 per cent – so it costs our government more to borrow than the US. My guess is those bumps will continue, with the possibility of higher yields just as likely as lower ones.
All it would take would be a bit of bad news on the inflation front to push yields well above 4 per cent again.
As for equities, the picture is different in the US from here and Europe. While shares just about everywhere have been solid, the harsh truth is that the S&P 500 is up nearly 19 per cent this year while the FTSE 100 is up less than 8 per cent. For British investors, the message I am afraid is that it pays to shift your savings across the Atlantic.
That leads to two questions. One is whether those near-record US share values are asking too much of corporate America. If the growth in earnings falters, then even great enterprises might suddenly look over-valued.
The other is that while the London market offers value, there are political risks for UK investors in the months ahead. Those risks include higher stamp duty and capital gains taxes, another hit to pension funds, a gilts tax, maybe even a wealth tax.
So let’s celebrate the fact that it has been a good first half to the year for most investors. But let’s also hope that the winter won’t be a harsh one.
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