Economic activity in the US and Euro area has continued to slow as tighter monetary and fiscal policies, and multi-decade high inflation, dampen business and consumer confidence, despite robust job markets. At the Fed’s annual Jackson Hole retreat, Fed and ECB officials signalled their willingness to continue tightening monetary policy, even at the expense of growth, until near-term inflation sustainably declines for a few months. Thus, it is now expected the Fed funds target rate to end the year at 3.75% (vs. 3.25% previously) and continue to expect the ECB deposit rate to end at 0.5-0.75%.
Probabilities of a recession in the US and Euro area in the next 12 months have also risen to 50% and 60%, respectively.
In contrast with the US and Europe, China continues to ease monetary and credit policies to revive growth after relaxing some COVID-19 restrictions. China’s service sector activity recovered for the second straight month in July, but manufacturing activity slowed again amid weakening global demand, resurgent COVID-19 waves in some regions, and power shortages due to droughts in southern China. While a full reopening of the economy is unlikely before the Communist Party Congress in October, expect the authorities to continue lowering borrowing costs to accelerate infrastructure projects and relaxing some property sector measures to revive housing demand. It is also expected that more targeted measures will be released to stimulate domestic consumption.
Impact on job markets as major central banks target inflation: The main message from Jackson Hole was that most Developed Market (DM) central banks, except for the BoJ, remain singularly focussed on taming inflation sustainably back to their 2% target, even if growth slows significantly in the coming months. In essence, central banks are ready to accept higher jobless rates in a bid to reduce wage pressures and consumption and, ultimately, subdue long-term inflation expectations. Thus, job market data, including initial jobless claims and monthly jobless rate numbers in the US and Europe, will be key indicators to watch in the coming months
China’s property market revival. While we remain constructive on China’s policy-driven economic recovery, a continued slump in the housing market is a key risk given the sector’s linkages with consumer sentiment and domestic demand. With global growth slowing sharply, a revival of domestic consumption is likely to be a key part of the government’s growth revival strategy. The latest 19-point policy package, which coincided with a reduction in a key interest rate used for mortgages, is a sign that authorities are focused on reviving the property sector.
Europe’s energy crisis: European gas prices surged in August after a series of pipeline maintenance shutdowns by Russia’s Gazprom. However, Germany could reach its goal of 85% storage capacity by early September, a month earlier than planned. Also, EU gas inventories have surpassed 2021 highs, despite an 80% cut to the Nordstream supply. EU’s reduced reliance on Russia could ease concerns about energy shortages this winter.
Rajat Bhattacharya, Senior Investment Strategist Standard Chartered
