Still going uphill
All eyes were on Jackson Hole on Friday as Chair Powell was set to indicate if there might be a Fed pivot – given that there are some signs that inflation has peaked, and hence could the Fed be less aggressive in subsequent FOMC meetings.
The Fed’s preferred inflation indicator: PCE deflator (Personal Consumption and Expenditures price indicator, which is seen as a broader and more timely indicator of consumer behaviour) declined for the first time (on a month on month basis) since the early days of the pandemic. As compared to the same time last year, it is still up 6.3%. About ¾ of the basket used to calculate PCE is services-oriented and this portion tends to be stickier.
US stocks plunged following Powell’s more-hawkish-than-expected comments that the Fed must continue to raise interest rates until they see consistent data showing that price stability is back. The S&P 500 fell more than 3%, its worst daily performance since June 2022, when the index fell 20% from its peak.
The Fed has twin goals: achieving price stability and maximising employment. As rates go higher in order to achieve the first goal, we are starting to see signs that tightened financial conditions are reverberating through the broader economy, despite record low unemployment currently.
Openings starting to close?
Looking at the latest jobs report, the unemployment rate is low and there are still almost 2 jobs available for each person seeking employment. However, according to Goldman Sachs, job openings have started to decline and some companies have announced hiring freezes with many to follow. We are starting to hear about layoffs in large blue-chip companies too.
It may take some time for effects of higher rates to percolate through the economy and show up in data for the Fed to be convinced that they have done enough to slow inflation down.
A breakthrough?
Elsewhere, Chinese stocks had a stellar week, led by technology companies. Using KWEB as a proxy for these companies, the ETF tracking Chinese internet companies is up more than 10% for the week.
Chinese regulators have indicated to major accounting firms that they should be prepared to bring audit work papers to Hong Kong, where a review by US Public Company Accounting Oversight Board (PCAOB) can be conducted.
The path to resolving this, where there is a systematic approach to having Chinese companies listed in the US comply with audit rules in order to remain listed, is still long but this is a positive step into resolving the audit dispute that has been ongoing for more than a year. Reuters reported that Alibaba Group Holding Ltd seems to be selected to be one of the first batch for inspections.
China’s ruling Communist Party will hold its five-year congress (20th Party Congress) from October 16. President Xi Jinping poised to secure an historic third leadership term. Focus would be on “dynamic zero” COVID policy.
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