The rebound in equity markets over the summer following the US Fed’s policy meeting in July is unlikely to be the start of market recovery as inflation numbers are still high and real interest rates are unlikely to fall anytime soon. Underlying macro data continues to trend downwards, with further earning downgrades expected to follow (and reflected in recent Q2 earnings releases). All eyes will be on Federal Reserve Chair Jerome Powell during his scheduled speech on Friday after central bankers gather this week at the Jackson Hole economic symposium. The event has been used in the past as a venue to make key policy announcements. Powell is expected to re-state the Fed’s resolve to raise interest rates but will stop short of predicting the pace and magnitude of the rate tightening. Inflation is still far above the Fed’s 2% target, but Powell has emphasized in the past that these pressures would prove transitory and not broad based. PMI data release is expected for the Euro Area, with Germany publishing its Bundesbank Monthly report presenting new data regarding the country’s economic situation. The situation in Ukraine continues to place downward pressure on European equities.
Commodities, FX and Bonds
In its Cross Asset Weekly note, Bank J Safra Sarasin notes that interest rate volatility in the euro area has ‘spiked to levels not seen since the Global Financial Crisis’. There is considerable uncertainty around the euro-area policy rates which translates into volatility in bond yields given the inflationary pressures and weakening economic environment in the Euro area. The European Central Bank is expected to hike its policy rate in the coming months within a neutral range where subsequent large moves will be less likely. Accordingly, interest rate volatility is expected to fall in the final months of 2022. Commodities have pulled back since their highs in March on the expectation of weaker demand ahead (Copper is generally a leading indicator for business cycles). However, tight supply chains and the energy transition should prevent large corrections in metal prices.
Please find full weekly note below: