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Federal Reserve officials will hold their annual Jackson Hole symposium next week, when the US central bank’s chair Jay Powell is expected to offer some clues as to how the central bank will approach monetary policy decisions this autumn.
Powell’s speech on Friday morning will be the highlight of the three-day event in Wyoming. In past years, he has used the occasion as an opportunity to steer market expectations about Fed policy during the late-summer gap between meetings. At present, traders in the futures market are placing very low odds that the central bank will raise interest rates when it next meets in September, but they are divided on whether a final rate increase could come in November. Powell’s remarks are likely to sway those expectations.
Since the Fed’s meeting in July, two significant developments have occurred: a promising inflation report for July, and a bigger-than-expected slowdown in US hiring in the same month. Both suggest the Fed could end its campaign of rate raises at the current range of 5.25 per cent to 5.5 per cent. Still, another round of inflation and jobs data intervenes between the Jackson Hole summit and the September Fed decision, so surprises on either may change the outlook even after Powell speaks.
Kate Duguid
Will gilts yields keep drifting higher?
Benchmark UK borrowing costs surged to their highest level since 2008 this week as stronger-than-expected wage data raised fears that the Bank of England’s battle against inflation has not yet been won.
Investors across the developed world have been selling government bonds, thus pushing yields higher, as the strength of the US economy has prompted investors to remove bets on imminent interest rate cuts.
But the rise in UK bond yields has been the biggest. Ten-year gilt yields rose 0.15 percentage points this week to 4.68 per cent. That was about double the move for benchmark US Treasury yields, which rose 0.07 percentage points over the same period.
The UK’s outsize inflation problem is part of the reason its debt yields are increasing by more than in other countries, surging on Tuesday after official figures showed wages had grown at a record annual rate of 7.8 per cent in the three months to June. Swaps markets are pricing in UK rates peaking at 6 per cent by the end of the year, up from 5.25 per cent now.
Ross Walker, chief UK economist at NatWest, said market pricing for interest rates implies 10-year gilt yields could rise to 4.9 per cent. “We think yields will have to go a bit higher, partly on further rate rises being delivered, but also this huge supply programme in the coming years,” he said.
The UK plans to sell about £241bn of gilts in the current financial year, with issuance net of BoE bond sales and purchases expected to be about three times the average over the past decade.
Mary McDougall
How weak is eurozone business activity?
Eurozone businessmen seem to have little to feel upbeat about, unless they benefited from tourism’s resurgence this summer. But more insight into how companies are faring in the region will come on Wednesday with the results of the latest purchasing managers’ poll.
Economists polled by Reuters expect S&P Global’s composite eurozone PMI, a gauge of business activity, to have declined slightly from 48.6 last month to 48.5 — keeping it below the 50 threshold that separates growth from contraction.
Policymakers at the European Central Bank will be watching the results closely as they decide whether to pause the recent run of interest rate rises at their next meeting on September 14.
“It could come down to what the PMIs are showing in August,” said Jens Eisenschmidt, chief Europe economist at Morgan Stanley. “If it stays at current levels then the ECB can raise rates once more. Another significant drop is likely to make them think again.”
Piet Haines Christiansen, director of ECB and fixed-income research at Danske Bank, said the big question was how the services sector was doing. “We all know the manufacturing sector is weak, so the question remains how the service sector is doing here in the tourism season of August,” he said.
Investors will get a glimpse of how ECB president Christine Lagarde interprets the latest data on the eurozone economy when she speaks at the Federal Reserve’s annual conference in Jackson Hole on Friday. Martin Arnold
