Last week there was much speculation about whether Fed Chair Jerome Powell’s annual Jackson Hole speech would be a market moving event or not, and it turned out it was, for equity markets at least. It was a short and punchy speech that reiterated what the Fed has been saying for some time - battling inflation is the number one policy priority, and if it means a recession and rising unemployment is the price that will have to be paid for future price stability, then so be it. He made three points:

1.    The seventies taught policy makers that “that central banks can and should take responsibility for delivering low and stable inflation” (emphasis on this).

2.    “The longer the current bout of high inflation continues, the greater the chance that expectations of higher inflation will become entrenched” and so a wage/price spiral should be avoided at all costs.

3.    They will “keep at it until the job is done.”  

He then repeated that phrase on closing for added emphasis, and it is this comment which is now being compared to Mario Draghi’s “we’ll do whatever it takes” speech. That speech marked a turning point in the European debt crisis, one which turned out to be very market friendly. This speech was not meant to reassure markets, and it may have been the tone of the opening remarks that were particularly chilling for equity markets:

“Restoring price stability will take sometime and requires using our tools to forcefully to bring demand and supply into better balance. Reducing inflation is likely to require a sustained period of below-trend growth. Moreover, there will very likely be some softening of labor market conditions. While higher interest rates, slower growth, and softer labor market conditions will bring down inflation, they will also bring some pain to households and businesses. These are the unfortunate costs of reducing inflation. But a failure to restore price stability would mean far greater pain.”

This caused US markets to fall by around 3% on the day, leaving them down more than 4% for the week. The Nasdaq was down by a bit more, with all the large tech stocks down5-10%, but the falls were also fairly broad-based with all sectors apart from energy and materials down sharply. This is not surprising, as he is signalling that while they are forecasting a potentially painful recession, the Fed will most likely not be there to rescue the economy. This is arguably not news, but it did directly counter the growing hope that with inflation potentially peaking, a soft landing was possible, and if it wasn’t then the Fed would pause rate hikes in the knowledge that the inflation was heading in the right direction. This speech left no doubt that rates are on the rise until ‘the job is done’.    

The reaction from other markets was more muted, notwithstanding a 2% fall across Asian markets on Monday, and emerging markets were actually up for the week, led by Latin America which remained in positive territory for the week. The Australian market had been more or less flat for the week, with moderate losses from the banks being offset by gains form energy and materials stocks, while Qantas defied its critics (mostly customers) with decent results and a $400m stock buyback. Woolworths was one of the prominent losers after results showed they were doing better than Coles but in an increasingly difficult operating environment where it is getting more difficult to pass cost increases on to consumers. These results capture the tone of the reporting season so far - a mixed bag with as many earnings misses as beats, but overall fairly positive.    

Perhaps most surprising after the Jackson hole speech was the lack of movement in bond markets which barely flinched, and in fact long term yields actually finished the week lower in most Western markets. Having had the weekend to think about it, Australian yields have ticked up more recently and US bonds appear to be following suit. Corporate bond spreads also eased slightly while commodity markets were mostly up.

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