Jackson Hole: Optimists see rate cuts, pessimists see inflation

In the past week, the market has experienced a strong rebound. The main reasons driving the global stock market rebound are twofold. First, the U.S. July CPI report showed moderate performance, making a rate cut in September almost certain. Second, U.S. economic data remains resilient, and concerns about an economic recession are starting to fade. For the stock market, these two points mean that both the "numerator end" (macroeconomics) and the "denominator end" (risk-free rate) have positive feedback.

From this perspective, the sharp drop in the market around August 5th seems more like a spontaneous adjustment of crowded positions. There have been no major changes in economic fundamentals, yet the market has experienced ups and downs. If the market adjustment is unrelated to macroeconomics, the rebound in the market can be attributed to macroeconomics.

Another interesting phenomenon during the stock market rebound is the stability of long-term government bond yields. Taking the 10-year U.S. Treasury yield as an example, while the Nasdaq rebounded by about 8% in the past 10 trading days, the 10-year U.S. Treasury yield has remained at around 3.8-3.9%. This suggests that the market seems more concerned about the possibility of missing out on the rate cut trade frenzy, hence preferring to hold positions that seem somewhat biased in terms of trading value.

The discussion about whether the U.S. economy is heading towards a recession seems to have been put on hold, with some investment banks even lowering the probability of a U.S. economic recession. The focus of the market in the coming week will be on Powell's speech at Jackson Hole. The importance of this speech cannot be overstated. The market almost unanimously expects the Fed to cut rates in September, and Powell's speech is likely to pave the way for a rate cut in September.

Historically, speeches at Jackson Hole tend to be academic, so Powell is likely to touch on topics that academia has been focusing on, such as potential growth rates, neutral interest rates, and medium-term inflation targets, and may hint that the U.S.'s potential economic growth rate, neutral interest rate, and inflation rate center have all seen upward movements.

Of course, the market's focus remains on whether there will be a rate cut in September. It is believed that Powell will shift the focus, stating that despite structural changes in the economy, as long as rates are restrictive, the Fed is confident in maintaining basic stability in inflation. Such statements are actually setting the stage for a rate cut. Therefore, different parties are likely to interpret it differently, with optimists seeing a rate cut and pessimists seeing inflation.

In the past week, the market has experienced a strong rebound. Gold has once again hit a historical high. In this round of market adjustment, gold has performed exceptionally well, with almost no correction and reaching new highs. It must be said that gold remains one of the most outstanding investment assets.

The main reasons driving the global stock market rebound are twofold. First, the U.S. July CPI report showed moderate performance, making a rate cut in September almost certain. Second, U.S. economic data remains resilient, and concerns about an economic recession are starting to fade. For the stock market, these two points mean that both the "numerator end" (macroeconomics) and the "denominator end" (risk-free rate) have positive feedback From this perspective, the sharp market decline around August 5th seems more like a spontaneous adjustment of crowded positions, with the market stampede possibly triggered by some economic data falling short of expectations. Due to a sudden collapse in market confidence, despite the normal performance of economic data during that period, investors could not be held back. After the rapid digestion of floating funds, investors seemed to suddenly rediscover the resilience of the economy, causing the market to rise again.

In other words, there has been no significant change in the economic fundamentals, but the market has experienced ups and downs. If the market adjustment is unrelated to the macroeconomy, the market rebound needs to be attributed to the macroeconomy.

During the rebound in the stock market, another interesting phenomenon is the stability of long-term government bond yields. Taking the 10-year US Treasury yield as an example, while the Nasdaq rebounded by about 8% in the past 10 trading days, the 10-year US Treasury yield remained at around 3.8-3.9%. This situation implies that the market seems more concerned about missing out on the frenzy of rate cut trades, hence preferring to stay in positions that seem somewhat biased in terms of trading value.

Regarding the discussion on whether the US economy is heading towards a recession, it seems to have been put on hold, with some investment banks even lowering the probability of a US economic recession. In the upcoming week, the market's focus will be on Powell's speech at Jackson Hole. The importance of this speech cannot be overstated.

The market almost unanimously expects the Fed to start cutting rates in September, and Powell's speech is likely to pave the way for a rate cut in September. Historically, speeches at Jackson Hole tend to be academic, so Powell is expected to touch on topics that academia has been focusing on, such as potential growth rates, neutral interest rates, and medium-term inflation targets, and may hint that the US's potential economic growth rate, neutral interest rate, and inflation rate center have all shown signs of rising - these are issues that academia is very concerned about.

Of course, the market's focus remains on whether there will be a rate cut in September. It is believed that Powell will also change the subject, stating that despite structural changes in the economy, as long as interest rates are restrictive, the Fed is confident in maintaining basic stability in inflation. Such statements are actually setting the stage for a rate cut. Therefore, different parties should take what they need - optimists see a rate cut, while pessimists see inflation.

At mid-year, the market once doubted that the Fed would not cut rates this year. I was chatting with a colleague, and I asked him if he knew about the "September Miracle." He said he didn't know. At that time, my view was that a consensus view in the market often presents opportunities for reverse trades, and the result seems that the "September Miracle" may indeed come true.

Lastly, a brief mention of last week's economic data, retail sales in the US in July increased by 1% month-on-month, with the growth rate reaching the highest level in a year and a half, exceeding expectations of 0.4%, and the previous value revised from 0% to a decline of 0.2%. This indicates that even in the face of high prices and borrowing costs, consumers still show resilience, easing concerns about a US recession. Meanwhile, the number of initial jobless claims in the US for the week ending August 10th dropped to 227,000, lower than expected, reaching the lowest level since July

Meanwhile, Japan's second-quarter GDP report also exceeded market expectations. With a sharp rebound in the Nikkei Index, the market seems no longer worried about the Japanese economy. However, in any case, in an economy where wages are rising, the nominal growth rate should remain at a decent level, and investors indeed do not need to worry excessively. Looking back, there seems to be a lot of doubts and distrust in the market about the Japanese and American economies, and only the performance of the real economy can dispel market doubts.

Authors: Zhou Hao, Sun Yingchao, Source: Guojun Overseas Macro Research, Original Title: "[Guojun International Macro] Jackson Hole: Optimists see rate cuts, pessimists see inflation"