After much anticipation, the Jackson Hole Economic Symposium finally kicks off today. Investors are keeping an eye out for signals from the United States (US) Federal Reserve (the Fed) regarding the much-debated tapering of asset purchases and the raising of interest rates. While concerns about the Delta variant have eased following the FDA’s approval of the Pfizer vaccine, the Fed still opted for a virtual symposium this year.
Key themes for the past week include:
- All eyes on the Fed, as markets await new direction
- US GDP increases marginally in the second quarter of 2021
- Approval of the Pfizer vaccine boosts oil prices
- Dollar blows off steam ahead of Jackson Hole
FED TAKES CENTRE STAGE – AGAIN
There is a lot of talk around the Jackson Hole Economic Symposium in financial markets this time of year. The events at this symposium, and effect they will have on financial markets, will eventually find their way into every household globally. Interest rates, inflation and exchange rates ultimately affect the cost of goods and services that we consume every day.
What is the Jackson Hole Economic Symposium?
The Federal Reserve Bank of Kansas City’s Economic Policy Symposium in Jackson Hole is one of the longest-standing central bank conferences in the world. The event brings together economists, financial market participants, academics, US government representatives and news media to discuss long-term policy issues of mutual concern.
The Symposium typically selects a topic of discussion and then asks experts of the subject matter to submit papers to the bank for discussion and debate. To date, more than 150 experts have presented papers on topics such as inflation, labour markets and international trade.
What is the topic of discussion this year?
The topic of discussion this year is Macroeconomic Policy in an Uneven Economy. The symposium seeks to unpack the unequal economy and how policy will affect various elements of economic recovery, especially the most vulnerable. It is likely that two key topics are to be raised in line with the monetary policy objectives: racial inequality and climate change.
By devoting its annual conference to the economic divide, the Fed hopes to emphasise its new monetary policy framework. At the Symposium last year, the Fed changed its monetary policy approach to prioritise getting the economy as close as it can to maximum employment, even if inflation rises above its 2% target. Fed Chairman, Jerome Powell, has frequently referenced the later stages of the post-financial crisis recovery, pointing out job gains among low-income, Black and Hispanic households as a benefit of running easy monetary policy for longer.
“These developments underscore for us the importance of sustaining the expansion so that the strong job market reaches more of those left behind,” Powell said in 2019, just before the COVID crisis.
While the inequalities and unevenness of the US economy can bring about numerous debates and discussions around appropriate monetary policy, one can be certain to find COVID-19 as one of many topics to be discussed, especially as the Fed decided to hold a virtual event this year. This, after earlier comments that Delta Variant outbreaks are of little concern.
Impact on the financial markets
Most of us are familiar with some basic economic theory, including the correlation between interest rates and the value of a currency, but the effects of the monetary policy outcomes by the Fed, will not only impact the dollar, and subsequently the US financial market, but will have a ripple effect that will be felt across the globe.
The US’s high levels of quantitative easing, through asset purchases by the Fed, as well as low interest rates, have seen emerging markets benefit substantially from the excess liquidity in the markets due to the fact they offer higher yields to investors. Over the past week, since the announcement by the Fed that tapering may start this year already, we saw many emerging market currencies impacted, with the South African Rand reaching lows of R15.28/$. The reason being that the tapering of asset purchases and the increase in interest rates in the US, will in essence drive the US dollar higher and reduce the excess “cheap money” that finds its way into emerging market and other riskier assets.
GLOBE IN A NUTSHELL
The US economy accelerated an annualised 6.6% quarter-on-quarter during the second quarter of 2021, marginally missing market expectations of 6.7%. The rapid spread of the coronavirus delta variant, supply-chain disruptions, shortage of workers and a cooling housing market are all expected to weigh on growth for the rest of the year.
The number of Americans filing new claims for unemployment benefits increased by 4000 to 353 000, in the week ending 21 August, exceeding market expectations of 350 000. The increase comes after a four-week period of consecutive declines that sent the number of new claimants to their lowest level since March 2020. The easing of coronavirus-induced restrictions over the past months and the ongoing vaccination efforts have prompted employers to hire more workers to respond to growing demand. However, new weekly claims remain elevated compared to pre-pandemic levels.
Taking a look at Europe, European Central Bank (ECB) officials agreed unanimously that it was necessary to align the forward guidance on interest rates with the revised formulation of the price stability objective in the ECB’s new monetary policy strategy. Policymakers highlighted the importance of revising the forward guidance on interest rates, saying the decision aimed to provide a credible commitment to bringing inflation up to the new target and to provide safeguards against a premature tightening of monetary policy in the current environment, but it did not necessarily imply “lower for longer” interest rates.
Earlier in the week, strong Purchasing Managers Index (PMI) data showed that growth in the Eurozone private-sector activity stood at a 15-year high in August, even as manufacturing expanded at its slowest rate since February, due to widespread supply chain delays. Germany’s GfK Consumer Climate Indicator decreased to -1.2 heading into September 2021, from a revised -0.4 in the previous month. The reading was the lowest in three months, amid growing inflationary pressure and rising COVID-19 cases. The gauge for willingness to buy also declined by 4.5 points to 10.3.
The United Kingdom (UK) motor industry produced 53 438 cars in July, down by 37.6% from 85 696 a year ago, recording the first decline since February. It is also the worst July performance since 1956 as manufacturers grappled with the global shortage of semiconductors and staff absences. Production for the UK market declined by 38.7% to 8 233 while manufacturing for export fell 37.4% with only 45 205 were cars shipped overseas. More than a quarter of all cars produced in July were either battery electric (BEV), plug in hybrid (PHEV) or hybrid electric (HEV), their highest share on record, bringing the production to 126 757 units since the start of the year.
Looking at the stance of the Bank of England (BoE), policymakers in the UK raised inflation forecasts for 2021 and signaled that “some modest tightening” of monetary policy over the Central Bank’s forecast period was likely to be necessary if the economy continues to improve.
South Africa’s unemployment rate rose to 34.4% in the second quarter, up from 32.6% in the previous period. It was the highest jobless rate since comparable data began in 2008, amid the worsening pandemic crisis and also reflecting a week of deadly unrest and looting last month in parts of the country. The number of unemployed persons jumped by 584 000 to 7.8 million. The youth unemployment rate, measuring jobseekers between 15 and 24 years old, hit a new record high of 64.4%.
Meanwhile, Statistics South Africa (Stats SA) published updated estimates of gross domestic product (GDP) in South Africa, following a comprehensive rebasing of the data. Stats SA noted that this is in line with international best practices to periodically review and update the estimates of the size, structure and performance of the economy. As a result, the revised estimate of GDP in 2020 is now R5,521 billion, adding a whopping 11% compared with the previous estimate of R4,973 billion – an addition of R548 billion in estimated output. The annual growth rate for 2020 was revised from -7.0% to -6.4%.
EQUITIES: ONWARD AND UPWARD
Against most assumptions, all three US equity indexes continued to move higher in a big way this week. The Dow Jones was up around 1.52% by Thursday, with the S&P500 and NASDAQ exchanges leading the way forward at 2.60% and 4.03% respectively – a week, firmly in the tech sector’s hands. When looking at second quarter earnings, the retail sector continued to deliver some respectable results, with Ulta, Nordstrom, Dick’s Sporting Goods, Best Buy and Foot Locker all reporting stronger than expected earnings and sales numbers. However, one retailer wasn’t quite as lucky. Victoria’s Secret, once part of a bigger group of companies called L Brands, saw their profits coming in at $1.61 billion from $1.07 billion a year ago, however stated that actual revenue numbers are yet to have returned to pre-pandemic levels. With freight charges soaring over the lockdown period, the cost of overall underlying products within the business is expected to increase by $100 million by the fourth quarter, which ultimately dampens forward-looking guidance even more for the retailer. With a quick look at the tech sector, we saw Salesforce beating earnings at $1.48 per share versus the expected $0.92 per share, for the second quarter, while raising guidance on its forward-looking earnings into 2022. The company sees no impact from COVID-19 or any variants on its company in the mid-to-longer term.
Turning to the European Union (EU) and UK equity markets, equity exchanges across the board remained relatively unchanged, with the UK FTSE 100 moving 0.88%, the French CAC 40 moving 0.60% and the German DAX 0.12%. A mix of factors tamed the market this week, from the looming monetary policy adjustments in the EU and US, to the negative sentiment placed on the German economy from the citizen’s perspective. When looking at company earnings, Danish shipping giant, Maersk, reported a more than 200% rise in second quarter earnings before interest, tax, depreciation, and amortisation (EBITDA), $5.1 billion versus the $1.7billion reported in the same period last year, while German Insurer, Alliance, also beat earnings expectations for the second quarter. German’s Thyssenkrupp were also in the news, with the company announcing the sale of its infrastructure arm to German Investment firm, FMC Beteiligungs KG.
Heading east, China’s Shanghai index pressed 3.15% higher this week, while the Hong Kong exchange also headed 2.57% higher. Companies that made headlines included JD.com who released robust earnings numbers, while Ark Investment Management’s Cathy Wood announced Ark’s top up in the company. Tencent, Alibaba, Baidu, and food delivery company, Meituan, also enjoyed the confidence being breathed back into the tech sector. Thursday’s trading day, however, saw most Asian equity exchanges falling to 2% due to The Bank of Korea raising their interest rates to 0.75% from 0.50% for the first time in three years – Korea, being the first developed country to raise rates within the pandemic environment. South Korea’s Kospi fell by 0.58% on Thursday, in line with the Korean won’s slide against the US dollar, following the announcement.
Locally, the South African JSE saw overall value traded through the bourse returning to normal, following last week’s monster-of-a corporate action triggered by Naspers and Prosus, which saw around R150 billion being traded on a single day through the market. During the week, the All Share saw a modest 1.60% move higher, while the Top40 topped 2%. Since January, both major indexes have traded within a 6.7% trading range, neither breaking lower or higher. Looking at company news, Italtile continued to perform extremely well in the pandemic environment, lifting revenue by 25% for the year to R11.6 billion. Earnings per share were up 77% to R1.40 per share, with cash dividends and a special dividend for the year being declared as R0.75 per share, made up of a R0.25 normal dividend and R0.50 special dividend. Home improvement seemed to be the largest driving factor attributing to these robust earnings. Woolworths shares were up just over 1% this week, following their announcement that the company had improved its net borrowings situation by 91%, in part, by the selling of its Australian-based David Jones Elizabeth Street properties, as well as Bourke Street Men’s properties. Proceeds of these sales came to around R9 billion, which made a big dent as they work to whittle down their R17 billion debt line-item reflected on their 2020 balance sheet. By Thursday afternoon, Woolworths traded at R60.20 per share.
FIRES AND THE FED; METALS DODGING RED
Brent Crude and US West Texas Intermediate (WTI) oil both had astounding performances this week, mainly on the back of Pfizer-BioNTech’s COVID-19 vaccine being fully approved by the US Food and Drug Administration (FDA), and a fire on one of Mexico’s oil rig platforms which took around 400 000 barrels per day offline. Assisting the recovery of its recent seven-day downward streak, China made a move to reopen its Ningbo shipping-port, which was shut for two weeks, following a handful of unexpected coronavirus cases breaking out at the port. Rounding off a good run for oil prices, America’s Petroleum Institute (API) announced that a 1.6 million decline in oil stockpiles had been experienced last week. Trending over 10% higher during the week, Brent and WTI traded near $71.80 and $67.76 per barrel respectively, by Thursday afternoon.
Gold prices remained flat this week, continuing their attempt to break, and stay above, the $1 800 per fine ounce level, but without too much success. For the most part, gold hung tight on the run up to the Fed’s Jackson Hole Economic Symposium conference address later this afternoon, where Jerome Powell will be further clarifying the central bank’s view on the dialing down of the Fed’s bond buying program which was alluded to recently in July’s Federal Open Market Committee (FOMC) minutes. By Thursday afternoon, gold traded 0.4% higher for the week at levels of around $1 784.34 per fine ounce.
Trading between $990 and $1 020 per ounce this week, platinum prices remained largely flat by Thursday, while Palladium moved around 5% higher to levels of around $2 405. Effectively in a small bear market, both palladium and platinum are trading around 20% lower than their respective highs set between February and May this year. With both platinum group metals being largely involved in the vehicle-manufacturing process, the current uncertainty around global economies continues to cast a long shadow over the metals. According to Britain’s IHS Markit estimates, global vehicle production is expected to fall by around 7.1 million this year. Vehicle giant Toyota announced that vehicle output is expected to drop by more than 35% in September, due to production lines being halted as shortages in parts like semi-conductors become a longer-term issue.
TAKING A BREATHER
The dollar took a breather from its recent rally ahead of the Jackson Hole symposium, dropping to the lowest level in a week. On Thursday, the dollar index edged slightly higher to 93 points after the President of the St. Louis Fed, James Bullard, said he thinks the Fed should begin tapering of asset purchases in the fall and finish the process by the end of the first quarter of 2022. He called for a first-rate hike in late 2022. Meanwhile, the Kansas City Federal Reserve President, Esther George, said the Fed should start trimming its monthly bond purchases sooner rather than later and even though the delta variant poses a risk to the US economic outlook.
The euro remained steady near the $1.17 level for most of the week, as investors await US Federal Reserve Chair Jerome Powell’s speech at the Symposium today. At the same time, the ECB remains dovish and the economic recovery in the Euro Zone may take longer.
The British pound held above $1.37 with all eyes on the Fed. The pound Sterling remained close to its lowest level in a month, as investors rushed for the dollar after the Fed’s meeting minutes showed the increasing prospect of reduced monetary stimulus this year. At the same time, concerns over the pace of global growth due to the worldwide spike in COVID-19 infections hit risk appetite, while the BoE’s hawkish turn helped to curb the losses.
The South African rand traded around the R15.00/$ mark, before strengthening to R14.90 on Thursday. Remaining at the lowest since March, even as the dollar receded throughout the week. General dollar strength remains persistent due to fears of a slowdown in global growth on the back of the fast-spreading Delta variant and the prospect of an early tapering of Federal Reserve stimulus.
We start the day at R14.92/$ R17.54/€ and R20.52/£.
Written by: Citadel Trader, Jordan Weir and Citadel Global Director, Bianca Botes.
Citadel Global offers holistic treasury management services, including advice on currency risk management and hedging strategies, assistance in maintaining regulatory compliance, and foreign exchange execution and administration.