Chair Jay Powell at Jackson Hole: What Are The Key Takeaways?

​Jay Powell gave a speech in the lovely setting of Jackson Hole, Wyoming on Friday.​

The speech was most notable for how brief it was. At around fourteen minutes it was as short and as sweet a serious central bank policy statement as we can remember. He must have been keen to get back to the crisp mountain air and perhaps fishing? Nature bathing? Moose viewing?

Do we think Chair Powell likes himself a Wyoming Rodeo? Who can really say.

You can find his speech here.

And what about financial markets?

Well, when he began speaking, markets soared, then they cratered and then they kept going down. The S&P finished down well over 3% on the day and it is difficult to find an asset that did not react similarly except the mighty, mighty US Dollar.

Ouch.

Re-reading and re-watching it is hard to know what to think caused such a sharply negative reaction.

It seems most likely that Chair Powell simply refocused minds on the fact that the US central bank will risk sacrificing employment and possibly over-tightening policy to curb inflation. Nothing really new there but perhaps people are paying attention again?!

While the Chair of the Federal Reserve Board may have spoken very succinctly (!) and forcefully, he did so along the same lines he has all year.

In short:

1. The Fed will fight inflation and do "whatever it takes" to get it under control.

2. This will require a period of lower or below trend growth as a direct consequence of this campaign to curb inflation.

This latter sentiment might have been what spooked some investors but this has been clear and obvious for months as regular readers of this newsletter know.

Here is Powell yesterday:

‘‘We will keep at it until we are confident the job (i.e. killing inflation) is done.’’

and here he is back in May:

"Inflation is much too high and we understand the hardship it is causing, and we're moving expeditiously to bring it back down. We have both the tools we need and the resolve it will take to restore price stability on behalf of American families and businesses."

Same old, same old. And a reason to remain very cautious about investing in financial markets.

We couldn't help but notice two other data points that might both complicate and challenge the above conviction, however.

The first happened at the exact same time that Chair Powell was speaking. The University of Michigan Consumer Sentiment survey came out and

1. Easily beat expectations (58.2 vs 55.1)

2. And recorded that respondents have long term inflation expectations coming down further.

Both of these data points are pretty positive and very welcome!

Less positively and less reported in the mainstream press is what continues to go on in Europe.

Electricity prices continue to skyrocket in the continent. Last week we mentioned that prices were well over double the previous spike at the end of 2021.

The causes are diffuse: Russian pipeline "maintenance"; a French nuclear crisis; classic late summer low wind production, drought-hit hydro etc. etc.

Well, this week these prices continued to ascend:

• German 1-year forward: €725 per MWh

• French 1-year forward: €870 per MWh

The 5 year average was between €40-50 per MWh.....

The current US price is around ~$150 a MWh.

Here is how it looks.

For context, German electricity prices are up +14% over the last day, +115% compared to last month, and +223% over the last 3 Months.

That is simply stunning.

Here are present German prices compared to other years:

As we remarked last week, this might not be on the front pages of newspapers in America but it will raise several rather significant questions:

1. How long this lasts will determine how steep and how prolonged the coming European economic downturn will be?

2. What will this do to European support for the critical war in Ukraine?

3. What types of blowback will it have in European politics? On green initiatives and otherwise.

Remember in a democracy it is perfectly permissible to vote NOT to be green. There is nothing pre-determined about the carbon transition and we have already made a hash of it.

Difficult to predict how these cookies will crumble months ahead of time but crumble they will and we are in unknown territory.

• Inflation expectations are coming DOWN in the US while at the same time they are rising again and into economically ruinous territory in Europe.

This will present challenges to central bankers and investors alike.

• One thought that strikes us: many European economies are powered by a far greater proportion of (excellent) small businesses. How will they operate or even survive in this environment? How can the state afford to subsidize them all?

Things will begin breaking in Europe very shortly and we hardly need to point out that it is still August (!) not December or January.

Things can moderate or even ameliorate as the autumn rains hopefully replenish hydropower capacity and wind power picks up but for anyone thinking Vladimir Putin won't continue to use gas supplies as an economic weapon this winter, we have some cryptocoins to sell you.

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