Weekly Comment: The Ghost of Jackson Hole

Market overview

Kevin Warsh’s speech at Jackson Hole at the end of August surprised on many levels. For starters, the new Federal Reserve (Fed) chair provided markets with a higher degree of guidance than he had previously been willing to give. Warsh was even prepared to share his views on the economy, saying, for example, that he felt the US was close to full employment. And above all, his speech had a notable hawkish tilt to it: “on balance, I would be hard pressed to describe broad financial conditions as restrictive.” Such was the hawkish tone that one commonly held view reported in the financial press post-speech was that interest rates would likely be raised at the Fed’s next meeting on 15-16 September, unless key economic data due before then came in on the soft side. All eyes on the data then.

The labour test

Enter the latest non-farm payrolls number. Would August’s monthly jobs report come in hot or cold or would it turn out to be something of a Goldilocks reading that did little to move the needle either way?

In the event, the report was hot, unequivocally so. At 162,000, the number of jobs added in August easily beat the 55,000 that had been pencilled in and was well above July’s (measly by comparison) reading of 21,000. That was not all. Accompanying the headline figure, the US unemployment level was unchanged at 4.1% while the labour force participation rate increased to 61.6% from 61.4%. Nothing obvious in there to stay the hand of the Fed from raising rates as early as September if, and it’s a biggish if, Warsh is prepared to risk the wrath of President Trump who wants, or rather demands, rate cuts. The futures markets thought so. The odds of a September rate hike rose to almost 60% following the report.

The activity test

Last week also saw the publication of August’s Institute for Supply Management's (ISM) manufacturing Purchasing Managers' Index (PMI). At 54.6, the number came in below July’s 55.6 reading and forecasts of 55.4. However, with numbers above 50 indicating expansion, the August reading stretches the run of consecutive months of growth out to eight months. Furthermore, the prices index remained at 71.1. That means raw materials prices were up for a 23rd successive month. Similar story with the services PMI, which rose 1.3% in August to 55.4. Here the prices paid component rose to its highest level in four years. Not much in the PMIs that scream out “rate hold!”

The inflation test

Just as time is running out until the next Fed meeting, so too is the number of economic data releases that could swing the vote. One key set of numbers, however, is looming ahead— August’s US consumer price inflation (CPI) readings. At the time of writing, headline CPI is expected to remain unchanged from July’s year-over-year (YoY) reading of 3.4%. Core CPI, which strips out food and energy prices, is forecast to come in at 2.4% compared to 2.5% in July.

Arguably with oil prices on the march again following the resumption of hostilities in the Middle East, core CPI is the one to watch. If there is enough of a slowdown here, Warsh and co could be given the cover they may feel they need to keep rates on hold. At least one Fed governor, Christopher Waller, has gone on record to say “If there is continued progress towards our 2 per cent goal, then I am willing to support holding the policy rate at its current level.”

US inflation numbers tend to be highly anticipated. The August 2026 print appears doubly so.  If the numbers come in strong, then Warsh and the rest of the committee may have to go ahead and raise rates or risk the Fed’s credibility taking a further knock. The Ghost of Jackson Hole could well come back to haunt Kevin Warsh and the Fed.

Weekly market moves:

The MSCI All Country World Index (MSCI ACWI) rose by the tiniest of margins, ending the week 0.1% higher, up 15.1% year-to-date (YTD).

United States:

Like the global index, the main US stock benchmark eked out a 0.1% gain for the week (+13.6% YTD).  Don’t be fooled into thinking the flat weekly outcome meant the stock market was leaderless, as it grappled with higher oil prices and consensus-busting non-farm payrolls data. A look at the relative performance of growth and value suggests otherwise. Driven by technology stocks, large-cap growth (+0.6%) outperformed their value peers (-0.3%) by the largest margin seen in a month. YTD, growth (+4.7%) is still playing catch-up with value (+23.5%) however. Small caps meanwhile added 0.2% over the course of the week (+14.5% YTD).

With oil prices rising and stronger-than-expected jobs data, yields on US Treasuries continued to rise. The yield on the 10-year Treasury rose six basis points to 4.78% (up 61 basis points YTD). The 2-year Treasury yield edged up two basis points to 4.37% (up 89 basis points YTD).

United Kingdom:

For the second week in a row, the UK large-cap index ended the week up +0.1% (+11.8% YTD). Mid-caps gave back the gains made the previous week after losing 1.4% (+12.0% YTD). Sterling meanwhile was unmoved at US$1.35.  Gilt yields however continued to tick upwards. As well as following US Treasuries higher, gilt markets are also dealing with mounting concerns surrounding the public finances and what will be included in the upcoming budget. The yield on the 10-year gilt finished the week up seven basis points to 5.13% (up 66 basis points YTD).

Europe ex UK:

The MSCI Europe ex-UK Index was the outlier after finishing the week 1.0% lower (+11.7% YTD). As well as rising oil prices and government bond yields, European markets are having to deal with a rising interest rate environment too. The European Central Bank is expected to hike rates by 25 basis points for the second time this year when it meets later this week.  Currently, interest rates stand at 2.25%.

At the national level, Germany’s main stock market was among the weakest, falling 2.0% (+6.4% YTD), perhaps a nod to growing political uncertainty in the country following far-right party AfD’s victory in the Saxony-Anhalt regional elections.  France was not far behind with a 1.5% weekly loss (+4.2% YTD), while Italy finished down 1.0% (+19.5% YTD). Switzerland was unchanged (+11.7% YTD). As was the euro at US$1.16. Finally, the 10-year German bund yield followed the global pattern, rising six basis points to 3.34% (up 48 basis points YTD).

Important information

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