At the annual Jackson Hole conference, Fed Chair Jerome Powell announced the long-awaited conclusions of the Fed’s monetary policy review. We notice two important changes. First, the Fed will no longer tighten monetary policy simply because the unemployment rate is low, a significant change from during Janet Yellen’s term. Second, the Fed now aims for 2% inflation on average and will thus have to make up for inflation running below the 2% target by allowing it to move above 2% for some time. There are also some unanswered questions, though, and the formulation of the average inflation targeting is quite vague at this point. Markets reacted with a steepening of the US curve, a weaker USD and a further increase in inflation expectations.
We have had primarily good news on the economic recovery in Europe this week, at least in Germany. Here, the August Ifo business climate edged up further and beat expectations, driven in particular by further improvement in the current-situation assessment, while expectations stagnated. Improvement was seen in most subsectors but as in the PMIs, manufacturing registered the biggest increase in activity, while the improvement in wholesale and retail trade stalled.
Assessing the most recent economic activity with our High Frequency Activity Tracker, 26 August, on the other hand gives ambiguous results. Most of the German/euro area indicators have improved since last week but Google mobility numbers have worsened, so the jury is still out on the strength of the late-August economic recovery.
The German government is also not convinced that there is a rosy picture ahead; at least it has agreed to extend its wage compensation scheme until the end of 2021. It intended the compensation scheme to last 12 months but given the negative effects of the coronavirus outbreak, the government agreed to extend it in order to prevent mass layoffs.
Next week, we expect sub-zero euro area headline inflation (-0.3%) for the first time since May 2016. This should not create too many concerns at the ECB, though, as this is due mostly to base effects and the German VAT cut. On Thursday, Chancellor Angela Merkel said there are no plans to extend the VAT cut beyond 2020.
On the COVID-19 front, Moderna’s vaccine candidate stimulates the immune system of older people to the same extent that it stimulates the immune system of young people in a preliminary (phase 1) study. Moderna and the EU Commission have moved closer to a vaccine purchase agreement of 80 million doses (with the option to buy an additional 80 million doses). In many European countries, the number of new cases is rising but the pace is different from one country to another. Some are struggling with second waves, while others are experiencing ‘second waves in slow motion’. See more in our COVID-19 Update, 27 August.
Japanese Prime Minister Shinzo Abe resigned on Friday due to bad health. Upcoming party elections will find his successor and there are several candidates for the job. In the short run, we believe this is unlikely to bring much change to economic policy, as the economy is currently highly dependent on public support. The Nikkei tumbled 2%, while the JPY strengthened on the news of the departure of Abenomics’ originator.
