Good morning! It seems like this week is bringing back some activity as people are returning to their desks and getting a sense of the world's current state. So, let's take stock of where we stand now. The Jackson Hole symposium didn't throw any curveballs this year; Jerome Powell's tone was balanced in terms of the short-term outlook, and Federal Reserve rates are hovering around the possibility of another 25 basis points increase in November, with a 50% chance. What caught my attention, though, was the closure of the discussion about the R* - it's staying put at 2% as a long-term target. The message here is aimed at ensuring long-term inflation expectations aren't thrown into disarray. Meanwhile, long-term rates, which saw a surge in August, reaching levels not seen since October 2022, are a point of focus. Powell's metaphor of "navigating under cloudy skies without stars" seems fitting, creating a sense of monetary policy uncertainty after such a pronounced shift in Federal Reserve rates.
Turning to other regions, there wasn't much in terms of new developments from European bankers, and Japanese comments seemed rather inconsequential. Nonetheless, I'm sticking to my view that short-term rates will likely remain elevated for at least the next three quarters, but we're likely approaching a peak. Longer-term rates, as always, bring about more complexity and will need to be discussed in future conversations. On a positive note, the 30-year bond auction from yesterday was met with strong demand, which offers some respite.
I also have a belief that the inversion in USD rates is likely behind us. Despite the onslaught of negative news from China, particularly concerning the real estate sector and consumer sentiment, Chinese authorities are demonstrating a determination to prop up asset prices. While challenges persist, I'm of the opinion that the risk-to-return ratio for long positions in equities is looking favorable, bolstered by appealing valuations.
Speaking of equities, we saw an August correction of about 5%, but it wasn't cause for alarm, as losses were fairly evenly distributed across sectors (excluding the energy sector, which outperformed). The market managed to rebound yesterday, even in the face of a weak JOLTS report indicating a decline in job openings. As for earnings, there wasn't anything too exhilarating to report. Among the seven mega-caps, results were generally decent (with NVDA shining while Apple faced some challenges). Healthcare proved to be a mixed bag, materials appeared weak, and financials delivered a mixed performance as well.
Shifting to Europe, we observed Germany finally giving the nod to a €60 billion tax relief plan, mostly directed towards green investments and lower tax brackets. However, the ruling coalition appears to be losing its grip as time goes on. Furthermore, there's a significant profit warning from Orsted, a major player in renewable energy, with a $2.3 billion write-down of its US assets. Reading between the lines, it's clear that every 50 basis points increase in interest rates results in a $500 million equity reduction, just in the US market alone. It's a challenging environment for investments in a 4-5% interest rate world, and I would advise avoiding such equity investments. Additionally, I want to emphasize that the two major IPOs of ARM and Instacart appear to be overvalued and would be best avoided.