Investment Insights Investment Strategy

Hawks Gather at Jackson Hole

  • Aug 31, 2022
  • Andrew Gillham

The recovery in global stocks came to abrupt halt on Friday after central bank officials at their annual gathering in Jackson Hole delivered a clear message: higher interest rates are necessary to bring down inflation, even it brings some pain to households and businesses.

Early gains were wiped out and the blue-chip S&P 500 and technology focussed indices end the week 2.6% and 2.9% lower respectively.

It didn’t need an ornithologist to spot the hawks at the picturesque resort in Wyoming and the warnings they delivered were stark. Federal Reserve Chair Jerome Powell’s speech on Friday lasted just 8 minutes but it was long enough for him to assert that a deteriorating economic outlook will not hold the Fed back from raising interest rates.

Citing the 1970s, in which the Fed cut interest rates too early to boost the economy, Powell vowed to avoid making the same mistake this time around.

Other attendees at Jackson Hole delivered a similar message, including European Central Bank executive board member Isabel Schnabel. She acknowledged the ECB also had little choice but to hike interest rates further despite then increasing risk of a recession in Europe.

No other nation in the G7 is facing a bigger inflation crisis than the UK. Consumer prices rose 10.1% in July from a year earlier, the biggest annual increase since February 1982.

Ofgem, the energy markets regulator, announced last week that the energy price cap will increase by 80% in October, raising the average household gas and electricity bill to more than £3,500 a year. The Bank of England forecasts it will push inflation towards 13% but other analysts see it going much higher.

Citigroup published a report predicting UK inflation will hit 18.6% in January, higher than the previous peak of 17.8% recorded during the 1979 oil crisis, on the back of record European gas prices.

The Bank of England is a long way off its 2% inflation target and is under more pressure than its G7 peers to tighten monetary policy to get a grip of soaring inflation. Markets are now pricing interest rates to climb to 4.25% next summer. Just four weeks ago, rates were expected to peak at 2.75%.

The prospect of higher inflation and interest rates has crushed so called ‘safe haven’ bonds this year. UK government bonds suffered their worst month so far in August, falling more than 7%.

The event at Jackson Hole overshadowed most other market news, including the tail-end of the quarterly corporate earnings reporting season. Shares in Nvidia, the world’s largest semiconductor manufacturer, tumbled after it reported revenue of $6.7 billion for the quarter, missing analyst forecasts of $8.1 billion. The company blamed macroeconomic headwinds for the slowdown in demand of its gaming products such as graphics cards for PCs.

Shares in Zoom Video Communications, one of the biggest winners of the pandemic, also dived on disappointing earnings. The videoconferencing company reported net income of $45.7 million in the quarter ending 31 July, compared to $316.9 million in the same period a year ago. Shares in Zoom hit an all-time high of $568 in October 2020 but anyone who paid around $85 a share in February 2020, and held them until now, will be offside.

Energy prices reversed their recent slide and Brent Crude climbed back above $100 a barrel. Saudi Arabia warned that any revival of the nuclear deal with Iran which would allow Iranian oil to be sold on global markets would be countered by the Opec+ cartel cutting oil production.

There was much more volatility in European gas prices after Gazprom announced it would temporarily shut down the Nord Stream 1 pipeline, used to deliver gas from Russia to Europe via the Baltic Sea, for maintenance at the end of August. With tensions between Europe and Moscow running high over the conflict in Ukraine, shutdowns could become more frequent over the winter.

(Cover Image Source: Mathew Schwartz)

TEAM Asset Management is a trading name of Theta Enhanced Asset Management Limited which is regulated by the Jersey Financial Services Commission.