Real yields fall sharply after Jackson Hole

Powell sticks to a dovish message

Chart of the Day

There was not much drama from Fed Chair Powell on Friday, as he continued to send a fairly dovish message and gave little away with regard to the Fed’s likely upcoming QE taper. That dovish tone caused real interest rates to fall sharply, with both the 5-year and the 10-year TIPS yields down almost 10 bp. The dovish message also helped to support equities, which generally picked up, with the Russell 2000 doing especially well as it rose by almost 3%.

Macro

Powell continued to say that the current period of high inflation is transitory - the data on Friday showed that US PCE core inflation rose to 3.6% in July. That compares to the most recent core CPI rate of inflation of 4.2%.

The personal income and spending data for July showed the household saving rate rose to 9.6%, as the child tax credits led to higher incomes bu not higher spending.

There are more signs of softening growth, with Sweden’s Economic Tendency Indicator falling in August.

Mexico’s export growth has dropped back sharply, whereas its import growth remains high.

Markets

Bond yields declined on Friday following Powell’s speech.

The five-year/five-year forward breakeven inflation rate has picked back up to 2.25%, perhaps due to the belief that policy will be loose for longer.

Traders have continued to reduce their positioning across cyclical trades.

Non-commercial traders now hold a net long in aggregate USD contracts.

The Dow Jones Transportation Average has been edging up, but has yet to regain its recent high.

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