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WeekWatch -‘Federal Reserve Chairman Jerome Powell bolstered markets on Friday’ August 2021

WeekWatch -‘Federal Reserve Chairman Jerome Powell bolstered markets on Friday’ August 2021

Federal Reserve Chairman Jerome Powell bolstered markets on Friday, as he signalled a potential future shift in US economic policy during his speech at the Jackson Hole Economic Symposium.

Previously, Powell had said the US would continue its asset-purchase programme until it felt employment and price stability goals had been met. On Friday, he said: “My view is that the ‘substantial further progress’ test has been met for inflation. There has also been clear progress toward maximum employment.”

While acknowledging challenges remain in place – not least the continuing spread of the COVID-19 Delta variant in many US states – Powell said the Fed may begin slowly reducing the pace of asset purchases this year.

David Page, Head of Macro Research at AXA Investment Managers noted: “We argue that a key shift in language between the minutes of July’s FOMC meeting and today’s speech suggests that the Fed is poised between announcing a tapering of its assets in December (our outlook to date) and a little earlier in November. We consider data releases over the coming months as critical in that determination, but for now continue to suggest that an announcement in December is most likely.”

Tapering asset purchases won’t necessarily mean a change to interest rates, however, as the Federal Reserve has articulated a “different and substantially more stringent test” that must be passed before any increase in that regard, Powell said.

The certainty that Powell’s words provided had an immediate effect on markets, with both the Nasdaq and S&P 500 immediately growing into further record territory as a result.

This capped off a good week for US equities, which had been climbing throughout the week. The S&P 500 had fallen the week prior, but made up for these losses early in the week to finish the week at a new record high.

With the US economy so important globally, it’s perhaps not too surprising that Powell’s speech also affected non-US markets. The FTSE 100 finished the week up slightly, partly thanks to a surge in values on Friday afternoon.

The STOXX Europe 600 finished the week flat. Despite closing only an hour after the scheduled start time of Powell’s speech, it still ended the week with growth on Friday, however this wasn’t enough to make up for falls earlier in the week. European shares were also hit by falling German consumer confidence, as reported by market research company GfK on Thursday. The survey of around 2,000 Germans found the public had become increasingly concerned by rising prices and increasing COVID-19 cases.

A number of Asian markets continued to reel from China’s regulatory crackdown. As well a s its pressure on tech companies and monopolistic behaviours, Chinese President Xi Jinping has outlined measures targeting income regulation and wealth redistribution – potentially dampening prospects for luxury brands with strong sales in China.

While this might have rattled markets in the short term, Martin Hennecke, Asia Investment Director at St. James’s Place, pointed to the recent listing of China Telecom, the biggest flotation in the A-share market in a decade, and the strong market for initial public offerings (IPOs) in Hong Kong, to suggest that it is unlikely the importance of China’s private sector is going to dissipate anytime soon. He added: “In fact, it currently contributes approximately 60% of China’s GDP, is responsible for 70% of innovation, 80% of urban employment and provides 90% of new jobs.”

He added that, while it’s understandable that the flurry of recent regulatory interventions causes investor questions and concerns, this should serve as a timely reminder of the importance of diversification across both sectors and global markets.

AXA Investment Managers is a fund manager for St. James’s Place.

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