Wall Street Update and what to look out for at Jackson Hole this Friday

It seems the headline news is still, only now, catching on to the idea of rates staying higher for longer? Something we have been saying would be the case for at least 12 months.

Yes, that’s right, the Federal Reserve and ECB are going to stay up here for at least 12-18 months and may even go higher. This is something we will hear much more detail on at Jackson Hole this weekend. All the time in the background, commercial rates for consumers and businesses continue their steady march upwards. US car loan delinquencies are hitting record levels and moving into GFC style ranges.

We should expect some slightly positive comments from Federal Reserve Chairman Powell at Jackson Hole. The Chairman is likely to claim some victory over the movement of headline inflation back to at least near their preferred target range. Markets could react positively to such comments.

This is perhaps a fall in inflation that had more to do with the normal workings of economic forces, the adjustment of markets in response to the Ukraine conflict, and of course had to happen even with prices remaining very high but stabilising.

This is the key point in terms of the economic outlook. Inflation has stabilised to some extent, but maintains an upward bias as seen in core inflation. However, even if prices completely stabilised and inflation were to fall to zero, this still leaves consumers and businesses struggling under the weight of this massive pricing reset higher. This historic events will remain a heavy weight and downward pressure on the economy for some time.

Back to Powell at Jackson. He is likely to highlight inflation is back near the target zone, that rate hikes have been doing their job. However, he will follow up with further remarks along the lines that the Federal Reserve remains concerned about core inflation levels, services sector price growth and strong wage gains.

For these reasons he foresees rates remaining firm, and he may even mention that further rate hikes cannot be entirely ruled out.

All of this fits with the higher for longer rates outlook. Which will further encourage the commercial sector to keep rates higher for consumers and businesses alike too.

The equity market continues to be a two story affair. The magnificent seven and some other tech stories will continue to garner support, and their story seems to lay outside the universe of what is happening to the broad economy in the USA, or the interest rate outlook.

We saw this in Monday’s price action where the Dow Jones was down slightly while the tech sector bounced firmly. We were expecting a stock rally on Monday, but remain cautious for the outlook over the week. And longer term.

Main Street stocks that deal with the real economy are not faring all that well. The separation of Wall Street and Main Street continues.  This is a tricky maze which we will continue to attempt to navigate for you.

More broadly speaking, the outlook remains troublesome and caution deemed appropriate.

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