There is no business like central bank business
The trouble with reading central bankers in the past was that it was always time-consuming. So please do not expect the world to look different after the past weekend.
The summer of 2021 has not lived up to expectations. A summer of relief was in the cards, as life was meant to go back to normal. Yet in the past few weeks, some party poopers have appeared. First of all, the pandemic does not seem to be over but rather going into yet another variant. This time around, it is flaring up in new groups (the young) and haunting Asia again. The pandemic situation has been in constant flux anyway. What looks like a sound strategy by the authorities today, can look highly uncertain a little while later.
Take the ‘zero-Covid-19’ strategy that was applied in many Asian countries. While this was highly successful last year, the Delta variant points to a shift in favour of a pure vaccine-based strategy. But even here, the higher the infection rates, the higher the required vaccination rate. While everyone feels like an expert in the field after 18 months of pandemic spotting, we do not claim to be able to anticipate where dynamics are heading.
The second party-pooper this summer was inflation: The price spikes in goods and services — as much expected as they were — are now seriously damaging consumer sentiment by much more than expected. Granted, consumers curbing their spending to wait for prices to normalise is a good thing, as it shows that inflation is not turning from cyclical to structural. Yet some observers claim that the severity of the drop in consumer sentiment points to a more fragile global consumer who has been traumatised by the experiences of the past 18 months. This raises some questions for macroeconomic policymakers.
This time, the questions went to central bankers, who were set to meet at their annual Jackson Hole Symposium over the weekend. This retreat is to financial market observers what the Academy Awards are to show business. There may be a bit less glamour and media coverage overall, but the masters of money meet there to present the state of the art in their craft. Unfortunately, the gathering had to be moved back into the virtual space for the pandemic-related reasons mentioned above. But still: In the past, the Jackson Hole meeting paved the way for new policy measures to fight crises and shift the approach in deflation fighting. Given the latest shocks to the global growth picture, the question this time will be whether central bankers stick to their stance of when and how to remove the stimulus measures.
The trouble with reading central bankers in the past was that it was always time-consuming. So please do not expect the world to look different after the past weekend. In previous years, there have been times when it took investors a long while to figure out what was going on and linking it only thereafter to Jackson Hole. So, this time around it is good to know that they will likely have a lot of time to ponder on the speech scripts.
Until then, we deem a more cautious stance on cyclical risks as still warranted. This means that many of the trends established before the pandemic hold once again, e.g. not only the predominance of US asset markets, but also the focus on growth franchises. As for fixed income, we view the current environment as less beneficial to high-risk credit in various forms, which means curbing expectations there, not selling.
Speaking of showstoppers, the announcement of higher taxes for the wealthiest in China created quite some turmoil in financial markets. First and foremost, in the luxury space of course. We acknowledge that investors may become more sensitive to the news flow out of Beijing when it comes to ‘common prosperity’. Yet the policy shift may be designed to be a lot more ‘middle-class friendly’ than it is hostile to the ultra-wealthy. The Chinese luxury goods market is in the hands of younger consumers: In China, 78 per cent of luxury spending today comes from customers under the age of 35. It has grown from 66 per cent in 2015, highlighting that growth in the luxury segment is broad-based and less dependent on the older and ultra-high-net-worth individuals. Thus, in the medium term, the impact of the new policy could even lead to higher consumer spending in the luxury sector.
The writer is head of research at Julius Baer. Views expressed are his own and do not reflect the publication's policy.
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