In his Jackson Hole speech, Jerome Powell hinted that the current round of monetary policy tightening could soon be put on hold. This reassured the bond market, after 10-year US dollar yields threatened to break through a major technical resistance level of 4.33%.
Beijing has announced a series of stimulus measures to try and restore market confidence. They include a reduction in the minimum deposit required for property purchases and lower stamp duty on stock market transactions, which hasn’t been cut since September 2008 amidst the financial crisis. We’re likely to see further measures, at least until confidence returns.
Hedge funds did well during the August correction. Stock markets shed around 5%, but hedge funds were down just 1% on average. They are well positioned to take advantage of the high levels of dispersion within traditional asset classes.
The franc is strong enough already, Mr Jordan
Last week, the world’s leading central bankers met in Jackson Hole in the US for their annual summer get-together. Thomas Jordan, Chair of the Governing Board of the Swiss National Bank (SNB), certainly sparked some envy among his peers. Unlike in most developed countries and many developing countries, Swiss inflation has already dropped back to within the central bank’s target range. After hitting 3.5% last summer, annual inflation has now returned to 1.5%, and everything suggests that it will remain low as we head towards the end of the year.
So is the job done? As the next SNB meeting gets nearer (it’s due to take place on 21 September), it’s worth remembering that over the summer Thomas Jordan again ruffled feathers with talk of further rate hikes. The reason he gave was that the current drop in inflation might be short-lived, as electricity prices and rents are set to rise early next year – the SNB is actually fuelling the upward pressure on rents with its monetary policy tightening. But let’s not overlook the fact that many of the factors that drove up prices over the past two years are no longer an issue. We mustn’t, for example, forget that the supply chain bottlenecks have eased up, and that the prices of key commodities like oil, natural gas and grains have are down both over the last 12 months and when compared to the levels recorded before the war in Ukraine. And unlike in some other countries, there is no wage-price spiral on the horizon, since wage growth has been kept under control here in Switzerland.
What’s more, the strong Swiss franc has helped by keeping a lid on imported inflation. The latest readings show that both import and producer prices are actually down year on year. However, the sharply downward trend in both export orders and the purchasing managers’ index in July is a sign that the strong franc is starting to weigh heavily on the Swiss economy, especially given the global economic slowdown. We therefore think it would be smart not to follow in the footsteps of the European Central Bank, which is grappling with much more stubborn inflation, and instead join the club of central banks that have already announced an end to their monetary tightening.
Is it mission accomplished in the US?
The month of August is on track to be the worst this year for the S&P 500 index. The stock market consolidation we forecast has taken shape in recent weeks, with the US’s main equity index losing just over 5%. The Nasdaq has recorded an even sharper decline, dropping by almost 9%.
However, this stock market downtrend isn’t down to worsening economic fundamentals, and we’re not overly concerned about it. In fact, the US economy seems more resilient than ever, and the earnings season that’s just ended has again shown that the economy is holding up well despite the Federal Reserve’s monetary policy tightening.
Just a few months ago, bringing inflation down to close to 2% without triggering a recession seemed like mission impossible to most economists. Today, the target is in sight, with inflation coming in at just 3% last month. And the economy is holding up, even if there has been a marked slowdown and earnings growth has stalled.
We therefore think the recent correction is more of a healthy breather after a sharp rally. Valuations are down as a result and sentiment indicators are back at more normal levels, which has prompted us to take a more constructive stance on US equities in our portfolio allocations.
Author
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Daniel Varela holds a degree in business administration with a specialisation in finance from the University of Geneva and began his career in 1989 as a fixed income manager. He joined Banque Piguet & Cie in 1999 as head of institutional asset management and with responsibility for bond analysis and management. In 2011, he became head of the investment strategy and Piguet Galland's investment department. In 2012, he joined Piguet Galland's Executive Committee as CIO.
