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Jackson Hole; a great place for skiing and policy making

Neil Birrell, Premier Miton’s Chief Investment Officer and manager of the Premier Miton Diversified Growth Fund, looks at the slowing economic growth rate and what the US Federal Reserve Bank said at its Jackson Hole (virtual) retreat.

I’ve only been to Jackson Hole once; it’s a great place to ski. However, I haven’t been there for the US Federal Reserve Bank’s (Fed) annual economic symposium, which has been convened there since 1978. It was a “virtual” meeting last year and this year and is closely watched for clues to future policy measures.

The key note speech from the Chair, Jerome Powell, was the focal point this year, which I will look at below. But, first, some observations on the economic backdrop; a bit more of “more of the same”.

COVID vs. Vaccine

The headlines around the spread of COVID make interesting and divergent reading at present. One story might go with the success of the vaccine programmes and how they are getting on top of the problem, whilst another will run with how the newer variants are leading to greater lockdown restrictions. Of course, it will vary by country and region, with Asia struggling, Europe improving and the US showing signs of both, depending on which state.

There is little that can be said with any certainty about the ongoing nature of the pandemic other than it will come to an end. In the meantime, we will deal with its ebb and flow and the impact that it will have on the economy and financial markets. Investors in markets typically do not like uncertainty, which is likely to prevail whilst we go through this phase of the pandemic.

Is the economic recovery stalling?

In recent months there has been increasing concerns that the pace of the global economic recovery is at risk of slowing down. Those concerns have come into sharp focus and there is evidence that this is the case. This has been partly driven by the pick-up in the COVID variants, but also by supply chain shortages in the economy all around the world.

Again, the headlines tell the story. In the UK, McDonalds can’t provide its customers with their milkshakes; we can get over that, by drinking something else, but it does have a real economic impact. More importantly, the shortage of HGV drivers means that goods aren’t making to it to the shops, councils are having problems with domestic refuse collections amongst other issues, meaning that economic activity is slowing. It is not just COVID that is getting the blame; Tesco’s Chair has blamed Brexit for EU drivers going back home and suggested that supplies for Christmas could be at risk.

There are similar examples worldwide. Apple has delayed the return of staff to the office until January due to rising COVID cases, having only recently pushed back the date from September to October. This has the impact of reducing economic activity. In the automotive industry the shortage of semiconductors has led Toyota to say that it will only manufacture 540,000 vehicles in September rather than the planned 900,000, partly putting the reasons down to mounting COVID in Vietnam and Malaysia . Similarly, Ford is reducing production of some models in the US.

Is it coming through in the economic data?

Yes.

There have been a number of examples of data being disappointing. For example, UK retail sales unexpectedly fell 2.5% in July, the biggest fall since the economy went into lockdown in January. Employment data has been mixed, generally on the disappointing side, but some of that is explained by the supply shortages, although it does actually contribute to that as well; not a very virtuous circle!

However, most of the data we see is historic, to one degree or another. Forward looking indicators may give us a better idea of what is to come. Purchasing Managers Indices (PMI) are surveys taken of the spending intentions of businesses across all sectors and all regions and as such are seen as good guides of future economic activity. If the number is above 50, it is considered to indicate economic expansion or growth; if it is below 50, the reverse is expected. The good news is that they are all well above 50, the bad news is that the numbers are coming down.

For August, the composite PMI, which is a broad economic indicator, was 55.4 in the US, the lowest reading this year, down from 59.9 in July, well below expectations, having peaked at 68.7 in May. The same PMI in the UK fell from 59.2 to 55.3, having got to 62.9 in May as well.

Let’s be clear though; this is a case of the rate of economic growth slowing, not us heading towards recession.

What are the policy makers making of it at Jackson Hole?

Every time Jerome Powell speaks, his words are analysed between the lines and on the lines for any clues as to what the Fed’s thoughts are on future policy measures. Central banks have been unwavering in their support for the economy since the global financial crisis of 2008 and went even further through the COVID pandemic. That support has taken two main forms; ultra-low or zero interest rates and enormous asset purchasing programmes mainly aimed at bond markets to provide liquidity.

Financial markets have become addicted to this support and it is natural that there are concerns about that support reducing (tapering, as it is known), which it has to do at some point. The Fed have done an excellent job of managing the US economy and, therefore, to a large extent, the world economy. They have also done a good job of managing expectations over tapering. Of late the focus has been on inflationary pressures, slowing growth and how that might affect policy.

Last Friday, in his address, Jerome Powell said “My view is that the ‘substantial further progress’ test has been met for inflation” meaning that he believes it is heading towards the Fed target of 2%. He also said “There has also been clear progress toward maximum employment.” These are two of the main focal points for economy watchers and investors.

Expectations have been for tapering to maybe start towards the end of this year, in the form of reduced bond purchases; interest rates will not be going up for some time. The speech led us to firm up on those expectations. Bond and equity markets took it in their stride in the immediate aftermath, given the significant concerns around slowing growth rates, that is further testament to the way the Fed is handling the economy.

The last word

Let’s close on an upbeat note; vaccine programmes are progressing, financial markets are (for the most part) taking the uncertainty in their stride, company profits have remained strong despite supply problems, the policy makers are providing support and financial markets are taking into account future prospects. That last point is important; for now market levels appear reasonable. We should be planning for surprises; bad ones and good ones.


About the author

Neil Birrell, Chief Investment Officer, Premier Miton Investors

Neil Birrell is Chief Investment Officer for Premier Miton and is fund manager of the Premier Miton Diversified fund range. He joined Premier Miton in January 2013 from Elcot Capital, where he was part of the team responsible for managing multi strategy investments. Neil was previously Chief Investment Officer of Framlington Investment Management.


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