Skip to content

Powell preaches careful austerity

François Christen

François Christen

Chief Economist

Western central bankers seem prepared to sacrifice more growth to restore price stability.

Original article published in French on agefi.com

Jackson Hole and Nvidia have been the focus of considerable attention over the past week. The central bankers’ forum and the earnings results of the graphics processing unit (GPU) designer were presented as two major events likely to shake up the financial markets. In hindsight, investors gave a placid, almost indifferent welcome to Jerome Powell’s statements and Nvidia’s announcements.

Unsurprisingly, Jerome Powell’s speech hinted at the possibility of higher interest rates, while emphasizing the need for restraint in view of the “lags” that characterize monetary policy. The cautious message conveyed at the Jackson Hole symposium is compatible with a pause in September, followed by a final hike taking the key interest rate to a range between 5.5% and 5.75% during the fourth quarter.

The prospect of raising the inflation target, currently centered around 2%, was rejected by some. An opportunistic change in the rules of the game set by the Fed would have had significant effects on the dollar yield curve, but the central banker stressed his determination to maintain a restrictive course as long as inflation continues to evolve above an unchanged target. Although predictable, the austere tone of Jerome Powell’s speech pushed the yield on the 2-year T-Note above 5%, while exerting slight pressure on the yield on the 10-year T-Note, which fell back to around 4.2%.

As an appetizer, the PMIs released by S&P Global revealed a slowdown in activity in August (composite index down 50.4, versus 52 in July). Indicators due later this week (employment report and ISM manufacturing index) should catch the attention of central bankers and investors alike. Strong figures could tip the balance in favor of an increased rate hike, which is still far from unanimous. Conversely, weak figures would confirm investors’ skepticism regarding the Fed’s warnings.

Nvidia’s flamboyant results, hailed as a key indicator, did not have the effect expected by some US tech and Artificial Intelligence enthusiasts, even though they exceeded the expectations of analysts polled by Bloomberg and others.

In Europe, worrying economic developments prompted a decline across the euro yield curve. The yield on the 10-year German Bund dipped below 2.5% before rising again to around 2.6%. The erosion of PMIs and the deterioration of the business climate in Germany, as evidenced by the IFO index, should encourage the ECB to take a break in September until it has a clearer picture of inflation, which remains problematic despite the downturn encouraged by lower energy prices.

Like Jerome Powell, Christine Lagarde emphasized the need to re-establish price stability, which has not
yet been achieved despite the beneficial effects of lower energy prices. On both sides of the Atlantic, service
prices are still rising rapidly, and are still incompatible with central banks’ inflation targets.

Macro

The Fed and the ECB are in no hurry

The US central bank's patience is fully justified, but the ECB's wait-and-see attitude is questionable.
Read More →
Macro

Renewed realism and healthy correction

Investors have reassessed the prospects for interest rate cuts amid sticky US “core” inflation.
Read More →
Corporate

H2 and Full-Year 2023 Financial Results

2023 was another successful year for ONE swiss bank SA, brimming with achievements and culminating in healthy financial results.
Read More →
Macro

The Fed’s pivot? Not before May 1st

Powell's comments and the strength of the US economy invite investors to be patient.
Read More →
Macro

The prevailing optimism is not irrational

Recent macroeconomic indicators validate hopes of a “soft landing” for the USA.
Read More →
Macro

No shock, no rapid rate cuts

Governor Christopher Waller's message was only partially received by investors.
Read More →
Macro

Should we expect the Fed to pivot in March?

The rapid and large rate cuts priced in by Fed funds rate futures appear unlikely.
Read More →
Macro

The 2024 bond vintage is overpriced

The bright prospects sold by some strategists are undermined by the surge at the end of 2023.
Read More →
Macro

A dovish Powell reinforces prevailing optimism

But his New York colleague John Williams and European central bankers appear less conciliatory.
Read More →
Corporate

Bye Bye 2023

As the year draws to a close, we would like to extend our warmest wishes to you and your loved ONEs.
Read More →