Investment bulletin weekly week 35

Toward G3 monetary tightening ___________

Fed Chairman Warsh moves toward a rate hike Vis Nayar Chief Investment Officer Federal Reserve Chairman Warsh’s more hawkish speech on Friday at the Fed’s Eastspring Investments Jackson Hole conference sustains our expectation for the Fed to raise the Fed Funds rate. We read the speech as not just expressing concern about inflation persisting above the Fed’s target but also recognising that amidst robust Ray Farris Chief Economist economic growth and a historically low unemployment rate of 4.1%, monetary Eastspring Investments policy is not restrictive.

If we are right, markets will need to focus more heavily on the unemployment Viola Wang rate in this Friday’s US labour data than on the headline change in payrolls. We Economist have noted recently that the fall in the US labour force resulting from the Eastspring Investments

combination of net negative immigration and the downtrend in the labour force participation implies that even small payrolls gains can keep the US labour market tight.

We expect payrolls to at least match the current Bloomberg consensus for a 55k gain in payrolls in August and an unchanged unemployment rate of 4.1%. Our bias is to expect slightly higher payrolls, and we would not be surprised by a fall in the unemployment rate to 4.0%. Regional Federal Reserve bank surveys point to stronger employment. Initial jobless claims fell in the first three weeks of August, and the ADP weekly employment indicator rose in early August. A robust employment report could lead markets to fully price a rate hike in October, if not September.

Ahead of the Fed we expect the European Central Bank (ECB) to hike 25bps at its September 10 meeting and for the Bank of Japan to hike 25bps on September 18. The recent rise in Euro area PMIs shows that growth momentum has improved and we expect CPI inflation to rise to 3.4% in August from 2.9% in June, well above the ECB’s 2% target.

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Similarly, in Japan recent indicators suggest growth remains strong. The unemployment rate was lower than expected at 2.4% in July, down from 2.5% in June and retail sales grew a larger 2.4% mom in July on top of a 2/10ths upward revision to June. Against this background persistent yen weakness supports a need for BoJ hikes in September and January.

Two key implications for Asia stand out. First, rate hikes in these major economies and in Asia are limiting the US dollar’s ability to rally in response to the Fed by limiting moves in interest rate differentials in favour of the USD. We continue to judge the US dollar to be a long cyclical decline. One or two Fed hikes may delay this slightly, but the sooner they come the more likely the USD will be to weaken in 2027, in our view. Dollar weakness has historically benefited Asian equity markets by encouraging funds inflows into Asia.

Second, after large global monetary policy easing in 2024 and 2025, policy is now tightening slightly. This implies a creeping headwind for equity markets in 2027 that should increase the importance of well researched active security selection rather than broad index investing.

2.0% Policy rate momentum, 6m global weighted average