Traders are bracing themselves for a potentially volatile start to the week following signals from US and European policymakers that interest rates are likely to remain higher for longer. The annual conference at Jackson Hole in the US saw US Federal Reserve Chairman Jerome Powell indicate that the US could raise interest rates again, while investors also grapple with China’s latest efforts to support its equities market.
In his address at the Kansas City Fed’s annual symposium, Powell stated that the Fed is “prepared to raise rates further if appropriate”, but emphasised that monetary policy will continue to be shaped by economic data. Meanwhile, European Central Bank President Christine Lagarde has vowed to set borrowing costs as high as necessary and keep them there until inflation reaches its target.
Citi economists Andrew Hollenhorst and Veronica Clark noted that Powell’s speech reaffirms the recent increase in Treasury yields. Lagarde’s approach contrasts with her predecessor, Mario Draghi, who used his 2014 Jackson Hole speech to set the ECB on a course of quantitative easing.
Lagarde refrained from discussing whether the ECB should raise interest rates for a tenth consecutive time next month, despite some of her hawkish colleagues attempting to dismiss the idea. Previous Jackson Hole events have been used by central bankers to make significant policy announcements.
Last year, ECB Executive Board Member Isabel Schnabel and others set the tone for a prolonged attack on inflation. Lagarde’s approach differs from Draghi’s, as she has sought consensus rather than leading the way on monetary policy. Her comments come after a week of poor economic data from the eurozone, with Germany, the largest economy, struggling to recover from a recession and business surveys indicating a decline in both the manufacturing and services sectors.
The Jackson Hole conference had previously seen the 26 members of the ECB governing council remain disciplined and avoid revealing their positions. This has made it difficult to predict if the hawks are in the majority, although their voices have been prominent recently. Despite the gloomy economic outlook, Bundesbank President Joachim Nagel stated last week that it is too early to consider pausing rate hikes while inflation remains high.
In contrast to the dialogue surrounding the Fed, the Bank of Japan and the People’s Bank of China have taken a different approach. Chinese officials have intervened to support the yuan, while Japanese authorities are closely monitoring the movements of the yen. Asian currencies have already dropped 2% against the dollar this month, with the yuan falling to its weakest level in nine months.
Although data from Sunday showed that the decline in China’s industrial profits eased in July, the slowing economic recovery and deflation risks continue to pose a threat to the sector. China has also announced measures to support the equities market, including reducing the stamp duty on stock trades for the first time since 2008 and slowing down the pace of initial public offerings.
The hawkish stance of the US Fed may further impact regional equities, with the MSCI Asia Pacific stocks index on track to record its largest monthly decline in almost a year. Global funds have already withdrawn approximately $5.9 billion from emerging Asia stocks, excluding China, in August. Toshiya Matsunami, strategist at Nissay Asset Management in Tokyo, warned that high-tech shares in Asia could be vulnerable if US bond yields rise towards 4.5%.