In just a few days’ time, the market’s attention will shift to the remote town of Jackson Hole, Wyoming, as the Federal Reserve Bank of Kansas City throws open the doors on its annual three-day meeting. It’s the festival for the world’s economic movers and shakers – with central bankers, economists and academics gathering to discuss the major issues, with a special focus on interest rates and other monetary policy topics.
The theme of this year’s events cuts right to the central banking heart of things “Reassessing the Effectiveness and Transmission of Monetary Policy”. With the US economy remaining unexpectedly robust, even through the most aggressive rate-hiking cycle ever, it raises a couple of big questions. First, are traditional methods like interest rate adjustments starting to lose their effectiveness? And secondly, given all the pandemic-era economic quirks, is it time to rethink the tools that central bankers have at their disposal?
Now, the answers to these questions aren’t likely to be simple ones. But the conversations they spark could set the stage for changes that could eventually affect markets everywhere. Jackson Hole does have a history of serving up surprises. It’s been the backdrop for some game-changing pivots, like in 2010 when former Fed Chair Ben Bernanke began talking about more “quantitative easing” bond-buying to help speed the country’s economic recovery, or in 2020 when current Fed Chair Jerome Powell began talking about an “average inflation” targeting strategy. So keep one eye on the week ahead, because it could bring another twist.
What does seem certain is that Powell will give another reassurance to those who are expecting a September interest rate cut, the country’s first since March 2020. After all, inflation fell closer to target last month, dipping below 3%, and the job market has shown modest signs of weakening – neatly aligning the requirements for the kind of stimulus that lower rates can bring. The trouble is, investors are still jittery after a sharp market sell-off earlier this month and have begun wanting a larger-than-usual cut.
In the calendar
- Monday Earnings Estée Lauder, Palo Alto Networks.
- Tuesday Earnings Medtronic, XPeng.
- Wednesday Fed minutes. Earnings Snowflake, Synopsis, Zoom.
- Thursday German manufacturing PMI (August), the Jackson Hole Economic Symposium begins. Earnings Baidu, Intuit.
- Friday Japan inflation (July), the Fed chair speaks in Jackson Hole, Bank of Japan’s governor testifies to Japan’s parliament.
What you might’ve missed last week
US
- US stock volatility fell and markets regained some of their previous losses.
- A pair of indicators showed inflation continuing to ease in July, reassuring investors.
- Investment big guns from Buffett to Burry revealed their latest, intriguing stock plays.
Asia
- China’s economic woes stretched into the third quarter.
Italy
- European gaming company Playtech is in exclusive negotiations with Flutter Entertainment to potentially sell its Italian unit, Snaitech, for around £2 billion.
- Italy ranks as the third most preferred stock market in Europe, following the UK and Switzerland, according to a Bank of America poll.
- The Italian government is requiring Dongfeng Motor Group to agree to cybersecurity and data protection safeguards as a condition for supporting the Chinese automaker’s new plant in Italy.
- Telecom Italia sold its remaining stake in mobile tower operator Infrastrutture Wireless Italiane for €250 million.
Why it matters
The market’s mood calmed, with the volatility gauge – the VIX – sliding back to its previously low levels after a weeklong spike. This cooling off, fuelled by better-than-expected US inflation and jobs data, reflects the market’s belief that this month’s volatility was more technical rather than a deep-seated issue. That said, investors remain cautious small-cap stocks were shining bright a few weeks ago, but in recent days, they’ve lost some of their upward momentum. And that tilt away from those more economically sensitive companies may be the symptom of a slight nervousness about the big picture.
Positive inflation news came in twos for the US, with both producer and consumer price index increases hitting their gentlest pace in months. This progress in the inflation battle hints at a coming pivot for the Fed, which might soon shift its focus from taming price rises to encouraging full employment. The good news is that with inflation close to target, a first interest rate cut in September is almost assured. The bad news is that the market’s attention might soon turn to worries about the labour market – and what its weakness says about the health of the overall economy. Keep in mind interest rate cuts can boost sentiment.
Every quarter, the investment big guns – those with portfolios worth over $100 million – are forced to show their cards in a quarterly “13F” filing. And there were a few interesting moves in the recent reveal. Warren Buffett’s Berkshire Hathaway cut its largest holding, Apple, in half, and added a stake in Ulta Beauty – a move that plumped up the cosmetics chain’s shares by 12%. The Big Short-famous Michael Burry shrank the size of his portfolio, but beefed up his investment in Alibaba by 24%, making it by far his heftiest position, at 21%. The Bill Gates Foundation went 40% heavier into Berkshire (its top position after Microsoft), which now represents 21% of the overall portfolio. And Bill Ackman’s Pershing Square bought some Nike.
China’s economic troubles stretched into the third quarter, hinting that the government might need to approve another round of stimulus spending. Retail sales weren’t as bad as feared, but a drop in fixed-asset investment and weaker industrial production painted a slightly gloomier picture, suggesting that consumer and business confidence is on the decline. Adding to the concerns, China’s top steelmaker flagged an industry crisis that’s starker than during the downturns of 2008 and 2015, driven by the ongoing housing slump and shrinking factory activity.
Playtech’s possible sale of its Italian unit, Snaitech, to Flutter Entertainment could reshape the Italian gaming market, potentially giving the new entity control over 30% of the online market. And that would make it a top scorer in the industry. Meanwhile, Telecom Italia’s recent sales of its stake in INWIT and its fixed-line network are part of efforts to reduce debt, which could improve the company’s finances but also highlight the pressures facing Italy’s telecom sector. On the global stage, investors are leaning more toward UK stocks over Italian ones, reflecting concerns about Italy’s economic stability compared to the UK’s perceived safety. Italy’s ongoing talks with Dongfeng Motor Group also reveal a careful strategy to attract foreign investment while still protecting national interests. The government’s insistence on local sourcing and strict data protection is part of its cautious approach to foreign partnerships in key industries like automotive manufacturing. Overall, the developments suggest that while Italy is seeking to modernise and attract investment, it still faces challenges in ensuring economic growth and stability.
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