The Context: A Week of Highs, Lows, and Baggage
We enter the new week with a complex set of ongoing developments, both domestically for the US and well beyond its borders.
Markets shrugged off a weak start to the week, ending on a high note Friday as Federal Reserve Chair Jerome Powell’s unexpectedly dovish speech at Jackson Hole fueled a significant surge in the price of bonds, stocks, and other assets. In a pivot that came faster than many expected, Chair Powell placed a much stronger emphasis on the risks facing the labor market while simultaneously downplaying the inflationary impact of recent tariffs. As interesting as what he said, however, is what he left out—a topic I will cover in Monday’s column for the Financial Times.
While on the subject of the Fed, political pressures on the world’s most powerful central bank continued to intensify with fresh allegations of mortgage impropriety against a serving Board member. This follows three instances that resulted in the resignation of Fed officials, and a suspected fourth. The situation escalated when President Trump stated he would fire the Board member if she refused to resign, a comment that followed her own public declaration that she would not be “bullied” into stepping down.
All this comes at a challenging time for a central bank whose inflation target has been exceeded for four straight years and now faces mounting worries on the second element of its dual mandate: the labor market. These concerns are rooted in recent data showing that while those currently employed are keeping their jobs, the unemployed and new entrants face considerable challenges. As regards tariffs, and as detailed here, a range of data suggests that the initial hit to companies’ and exporters’ profit margins may now start giving way to selective consumer price increases in sectors where companies have sufficient pricing power.
On the international stage, the data was decidedly mixed. On the positive side, European (like US) PMIs came in stronger than expected, while Japan’s inflation moderated. However, Germany’s second-quarter GDP contraction of 0.3% was worse than the consensus forecast, marking the sixth quarter of negative growth in the last eight. Adding to global headwinds, Japan’s exports in July fell by the most in four years as US tariffs took their toll, and this occurred despite evidence that Japanese exporters had largely refrained from passing on those costs.
Meanwhile, the yield on long-maturity government bonds in several advanced economies continued to migrate higher, with Japan setting a new record and the UK at a level not seen for decades. Fortunately for the British government, a lower-than-expected July budgetary borrowing brought the three-month total back in line with forecasts. However, UK inflation did edge higher to 3.8%, up from June’s 3.6%.
Finally, in another sign of shifting geopolitical sands, China and India positioned themselves as the guardians of a multilateral trading system anchored by the WTO. This comes at an interesting time for both countries in their relations with the US—with India fending off high tariffs and other pressures from America to curtail oil imports from Russia, and China in the midst of trade negotiations ahead of the November 10 deadline.
Looking Ahead to the Week
The carryover from last week’s developments will be supplemented by a considerable set of new data, especially from the US but also from Europe. It is a calmer data week for China.
The PCE price measure—widely viewed as the Fed’s preferred gauge of inflation—is among the most notable US releases. We will also receive a host of manufacturing indicators, measures of consumer spending and income, a revised estimate of Q2 GDP, and additional updates on the housing market with new home sales.
Following Jackson Hole, watch for comments from other central bank officials to see if they echo or diverge from Powell’s dovish pivot. This will come at a time of continuing political pressure on the Fed and close interest in the nomination process for the next Chair.
Turning to Europe, look for PPI inflation measures, as well as the regular update of the European Central Bank’s 1- and 3-year CPI inflation expectations. We also get consumer and corporate confidence indicators, which will be scrutinized for any signs of a reversal from the recent, better-than-expected readings.
In Latin America, a significant amount of data will be released, including economic activity data for Argentina, which is undergoing major economic reforms, and Mexico, influenced by ongoing US tariff issues.
