News of the week summary - 08/25/2024
🏦Markets move as FED signals it is ready to cut rates
In the days leading up to the Federal Reserve’s anticipated Jackson Hole symposium (where the world's most important central bankers meet once a year to discuss policy), financial markets were tense, reflecting uncertainty about the future of US interest rates. Investors grew cautious, and the US 💲dollar fell, hitting its lowest level of the year. This came as markets anticipated the Fed would soon begin cutting rates, to counter slowing economic growth and recession fears. A reversal in the popular "carry trade," where investors borrow in lower-yielding currencies like the yen to invest in higher-yielding dollars, also contributed to the dollar's decline (read about the Yen carry trade unwinding here).
Earlier in August, weak US jobs data caused a market sell-off, but the situation began to stabilize with more robust economic indicators, like retail sales. This brought investors back into riskier assets, causing a recovery in the S&P 500, which had regained almost all its earlier losses. With this shift, investors anticipated a series of interest rate cuts—anywhere from three to five by year-end—as Federal Reserve Chair Jerome Powell prepared to lay out his vision for US monetary policy at Jackson Hole.
As the dollar weakened, 🧈gold surged. Investors started piling back into gold as a hedge against lower interest rates, pushing gold prices to record highs. Gold ETFs saw massive inflows, reflecting the renewed interest among institutional investors and hedge funds. Since gold carries no yield, it becomes more attractive when interest rates fall.
When Jerome Powell finally delivered his Jackson Hole speech, he confirmed many market expectations. He signaled that the time had come for the Fed to adjust its policies in light of slower growth and increased downside risks to the labor market. The markets responded positively, with treasuries rallying and the dollar falling. Investors now priced in multiple rate cuts by year-end, believing the Fed was committed to supporting the labor market while making progress toward price stability.
Powell's remarks indicated that inflation risks had diminished significantly, and the 🎯Fed’s confidence in reaching its 2% inflation target had grown. Following the speech, markets saw a 35% probability of a larger-than-expected rate cut in September, further dampening the dollar's outlook.
📉Globally, inflation expectations were also falling, with Europe seeing its lowest levels in nearly two years. This shift allowed central banks, like the European Central Bank and Bank of England, to consider rate cuts without reigniting inflation fears. The decline in inflation expectations was partly driven by falling commodity prices, especially oil and metals, as China’s slowing economy reduced demand for key resources.
🇸🇪Swedish central bank cuts rates
InSweden’s central bank, the Riksbank, has lowered its key policy rate by 25 basis points to 3.5% and signaled it might lower rates up to three more times this year, depending on inflation trends and economic conditions.
The Swedish economy has faced significant challenges, marked by weak growth and rising unemployment. Sweden's economic performance this year has been notably poor compared to other European nations, with some indicators suggesting the country is in a “clear recession.” Additionally, the Swedish housing market has been hit hard, with house prices falling sharply. This decline is partly due to the sensitivity of Swedish borrowers to interest rate changes, given the short fixed terms of many mortgages. Despite these challenges, the Riksbank’s inflation target of 2% has been met, providing some leeway for additional rate cuts to support economic activity.
The Riksbank’s decision to cut rates aligns with a broader trend of declining global interest rates. The central bank noted that with inflation under control, there is less justification for keeping rates at restrictive levels. Furthermore, global rates have decreased, reducing the depreciation pressure on the Swedish krona. In response to the rate cut, the krona appreciated, reaching its strongest level in six weeks against the euro.
Sweden's monetary policy has been closely watched since the 2008 financial crisis. The Riksbank was notable for its use of negative interest rates starting in 2015 to combat deflation and was one of the first central banks to lower rates in response to the COVID-19 pandemic and subsequent inflation surge driven by geopolitical tensions, particularly Russia's invasion of Ukraine.
The central bank's guidance of potentially two or three more rate cuts this year has been seen as more dovish than expected by some economists. This cautious approach reflects the bank’s broader concerns about economic stability, including the impact of domestic issues such as gang violence, which has exacerbated Sweden's social and economic challenges.
🥛China launches anti-dumping probe into EU dairy products
China has responded to the European Union's recent imposition of additional tariffs on Chinese electric vehicle (EV) imports by launching an anti-dumping investigation into imported European dairy products.
The Chinese Commerce Ministry announced that the investigation into EU dairy products is a response to complaints from domestic manufacturers regarding European subsidies. The probe will focus on various dairy items, including creams and cheeses. This action marks Beijing's most significant retaliation yet against the EU’s EV tariffs. China has already initiated anti-dumping investigations into French cognac and EU pork imports and has filed a complaint with the World Trade Organization (WTO).
The EU’s Chamber of Commerce in China expressed that such retaliatory measures were anticipated, noting a pattern of reciprocal trade defense actions between governments. The EU's Common Agricultural Policy (CAP), which is a major subsidy program for European farmers, has come under scrutiny.
In 2023, European dairy exports to China were worth approximately €1.8 billion, down from €2 billion the previous year. This represented about 9.5% of the EU’s total dairy exports. The Chinese dairy industry has claimed that EU dairy products have benefited from numerous subsidy programs, a claim that has fueled the current investigation.