Issue 99: Clues in Jackson Hole?

This Week’s Highlights

• Jackson Hole signals September cut
  At the Fed’s annual symposium in Wyoming, chair Jerome Powell gave markets yet another reason to believe September will mark a pivot in the US central bank’s policy, confirming the Fed is increasingly confident that falling inflation warrants an easing in financial conditions.
• US labor market undeniably cooling
  From a survey by the New York Fed, showing increasingly anxious and dissatisfied US workers, to a massive downward adjustment to last year’s BLS reported growth in nonfarm payrolls, evidence continues mounting that the Fed’s worries over jobs are justified.
• India’s economy growing keeps going
  With India’s composite PMI showing over three years straight of economic expansion, it’s easy to see why the country’s stock market has been a gem among emerging markets in the post-pandemic period—though that lofty growth comes with rather rich equity valuations.

The CIO’s Take:

• Even before Powell’s Jackson Hole comments, Fed Fund futures had a September move as a foregone conclusion, with 100% implied probability, the only question being how big the cut might be. Judging by Powell’s comments and July FOMC minutes, we see futures’ pricing of a 50 bps cut—down from a 36% to 24% chance—as still excessive.
• If the labor market weren’t quickly cooling, we wouldn’t put it past the Fed to keep holding rates here. But given recent months’ data, not to mention last week’s big downward adjustment to past BLS growth in payrolls, there’s a case to be made the Fed risks falling way behind the curve, cementing a 25 bps September cut, in our view.
• It won’t be news to readers that we like EM valuations here, especially if the Fed pulls off a soft landing and global growth avoids a big hit. While Indian stocks are something of an outlier, sporting even higher valuations than US shares, we see an active strategy as well suited to pick up quality stocks in an economy we expect to keep growing.

Clues in Jackson Hole?

Powell affirms cuts coming
Last Friday morning, Fed chair Jerome Powell addressed an audience of central bankers in Jackson Hole, Wyoming, at the Kansas City Fed’s annual economic symposium, confirming what we—and most others—have been increasingly expecting: “The time has come for policy to adjust.” With typical Fed caginess, he added that “the timing and pace of rate cuts will depend on incoming data,” though we see this as precisely the stage-setting required to make a 25 bps cut in September the default policy path at this point.

Expect more gradual easing
Why not a 50 bps cut? One of the hints we’ve taken from Fedspeak—not just Powell’s comments, but those of other current and former Fed officials opining on the conference—is that the bank still sees the US economy as strong and doesn’t view current moderation as dire. Bringing the policy rate down by two notches would be a nervous response to being way behind the curve, and we don’t believe Powell’s FOMC sees things that way. As such, we expect the market overestimates the pace at which rates ease toward the central bank’s long-term projections (see below).

Parsing July FOMC minutes
With so much attention on Powell’s Friday speech, some might have missed another data point we were watching last week: Wednesday’s release of the FOMC’s July meeting minutes. That readout confirmed that notwithstanding the bank’s unanimous decision to hold rates steady in July, several members saw a “plausible case” for cutting last month. Reassuringly, “the vast majority” on the committee expressed a rate cut in September would be “appropriate” barring a surprise in the data before then, citing employment risks as gaining on concerns over inflation.

Hints from BoE and ECB
Turning back to Jackson Hole, we note that it’s an international symposium on central bank policy and, as such, presenters also tipped impending moves in other key jurisdictions. The Bank of England’s governor, Andrew Bailey, for example, reiterated on Friday that despite the BoE’s initiating cuts earlier this month, “it is too early to declare victory” and remarked that the course would be “a steady one”. By contrast, members of the European Central Bank’s Governing Council dubbed another move at the ECB’s next meeting an “easy” call after the bank’s last cut in June.

Labor Weakness

Jobs risks more pronounced
In his remarks to the crowd at Jackson Hole, Powell noted that he and his colleagues at the Fed “do not seek or welcome further cooling in labor market conditions”. Indeed, it is a better balance of inflation and unemployment risks that the US central bank seeks to navigate through a start to easing next month. The downside they’d prefer to avoid—underscored, appropriately, in a study presented by professors Benigno and Eggertsson to academic economists gathered at the Wyoming meeting—is that a gently cooling labor market gives way to a much faster rise in US unemployment.

Big downward BLS revision
Along those lines, some readers will recall that just days after the FOMC’s end-of-July conclave, the US Bureau of Labor Statistics (BLS) released data on nonfarm payrolls, which showed lower-than-expected growth in jobs and US unemployment climbing to a three-year high. In fact, it turns out the cooling we’ve been seeing in recent months likely started much earlier, based on an annual “benchmark revision” released last Wednesday by the BLS (see below).

Once every year, the BLS supplements standard monthly revisions with a broader adjustment to last year’s data, based on findings in its Quarterly Census of Employment and Wages survey. For the year spanning April 2023 through March 2024, the BLS found payroll growth had been overestimated by a whopping 818K jobs. While that still puts monthly job growth at 174K versus the originally reported 242K for the period, it’s another sign of slowing to validate central bankers’ concerns shifting from inflation to employment.

Gloomy NY Fed survey
In a busy week for labor market data, the New York Fed on Monday posted results of its thrice-yearly survey of American employment conditions. Of those respondents who reported being employed back in the March survey, only 88% still had jobs, marking the lowest reading since 2014, while those indicating they expected to become unemployed rose to 4.4%, the highest figure in the survey’s history. In one more sign that consumers could use a break when the Fed meets in September, satisfaction with current compensation fell to 56.7%, down from 59.9% in July 2023.​​​​​​

India’s Stellar Growth

International equity focus
With Fed cuts on the horizon and signs America’s economic strength is moderating, US stocks ended last week up, though we’ve often noted that the soft landing seems priced in at this point, leading us to favor a higher tactical exposure to international markets where valuations might offer greater upside. In a bit of a departure from that case, we wanted to say a few words this week about stocks in India: a market in which valuations, with the MSCI India Index priced at over 26x forward earnings, are actually more expensive than US stocks, as the S&P 500 Index trades at merely 23.6x.

India’s PMI is on a tear
Of course, it’s all relative, and the reason Indian stocks might still be a ‘buy’ versus those in the US is that, while signs of moderation in US growth—and, for that matter, growth in the broader global economy—are increasingly causing investors to fret over the pace of Fed rate cuts, India’s economy has often seemed immune to such concerns. Its August PMI was a reminder of that strength, with a reading at 60.5, historically high and marking 37 straight months of expansion (see below), the Indian economy’s longest run since mid-2013.

Interestingly, beneath the composite numbers depicted in the chart above, India manufacturing growth has actually decelerated in recent months—reflecting the weakness in global demand we’ve discussed in past Perspectives—but has been more than offset by continued robustness in services. It’s also important to note that despite rapid growth, India’s inflation has fallen to historical lows, clocking in at 3.5% in July.

Growth may justify valuations
Given that kind of growth, it’s little surprise that Indian stocks aren’t cheap. Since the current streak of expansionary PMI readings started in August 2021, the MSCI India Index has posted a cumulative total return of 71%. That could be justified, as S&P Global recently forecasted India’s GDP to hit $7.5 trillion by the end of the decade, double its current level and enough to make it the second-largest economy in the APAC region. Belief in India’s growth story is one reason our models allocate to Indian stocks—albeit actively, targeting higher-quality growth at a reasonable price.