Last month, we thought that the flash purchasing managers indices, which provide a proxy for growth expectations, and the Jackson Hole Economic Symposium were top events. First, the flash purchasing managers index showed a general decrease from an elevated level. Most likely, this decrease in growth expectations occurred because of the pickup in COVID-19 cases globaly. The Jackson Hole Economic Symposium did not disappoint. Federal Reserve chairman, Jerome Powell, released statements suggesting that inflation has likely reached a sustained level above the 2% target, while employment has not completely recovered and the COVID-19 delta variant remains a risk. Heading into September, we think the following are the top three events that could impact financial markets.
The traditional method for analyzing monetary policy focused solely on changes to short-term interest rates. However, since the Great Financial Crisis (2008), assets purchasing programs by central banks (a.k.a. “quantitative easing”) are as important, if not more, than short-term interest rate policy. Unfortunately, we do not have a rich history of the impact of changing asset purchasing programs on financial markets. Currently, the US Federal Reserve Bank (“Fed”) purchases $120 billion of Treasuries and asset-backed mortgages per month. In our opinion, any reduction in this purchase program should be considered tightening monetary policy. Thus, financial markets could torture themselves in finding any insight into the Fed’s plan. The next official Fed meeting is on September 24, 2021.
Diverging COVID-19 vaccination policies
A quick glance at the COVID-19 vaccination rates shows a stark difference between Developed Market (“DM”) countries and Emerging Market (“EM”) countries. The average DM country has a 59% vaccination rate, while the average EM country has a 33% rate. The most recent growth expectations data also shows a significant difference between the DM and EM regions, with the DM region much more opportunistic about future growth. During the first week of September, the growth expectations data for a variety of countries will be released. While we expect a deterioration in growth expectations given the recent increase in COVID-19 cases globally, we will be more curious if the gap between DM and EM growth expectations remains. If the growth expectation gap remains, we would continue to expect DM country equity market performance, on average, to outpace EM country equity market performance.
Boats of trade
While the most recent US Consumer Price Index (“CPI”) reading showed a 4.1% year-over-year increase, criticism has grown that the CPI index does not reflect global inflationary pressures. Shipping accounts for 90% of traded goods. The Baltic Dry Sea Index, which measures shipping container pricing, has increased by over 210% year-to-date! As the surge in COVID-19 cases is likely to create increased pressure on global supply chains and slow down global demand, it will be interesting to see how shipping container prices react and, more importantly, long-term inflation expectations. So far this year, long-term inflation expectations have not increased as the market seems to think that inflation could be temporary.
Figure 2. Baltic Dry Sea Index
From a market information perspective, we expect September to be more exciting than August. The macroeconomic growth expectations data will begin during the first few days. COVID-19 related information, either vaccinations or cases, will occur throughout the month. And the US Federal Reserve Bank will conclude the month. We maintain the view that changes to US monetary policy are the most important driver of financial market performance during September.
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