Oil prices spiked on Monday after a fresh flare-up in the US-Iran war, while stocks were mixed as hawkish comments from Federal Reserve boss Kevin Warsh saw investors ramp up bets on a US interest rate hike.
With inflation remaining stubbornly high, largely on the back of elevated energy costs, the US central bank has come under pressure to act, while Warsh’s refusal to provide guidance has stoked uncertainty.
But in a highly anticipated speech at the Jackson Hole symposium of central bankers and economists in Wyoming, he left traders with little doubt that he was prepared to increase borrowing costs.
Warsh said, “We must be confident that underlying inflation is moving to our objective, clearly and at sufficient speed. Otherwise, we have work to do.”
He described the spike in inflation, currently at 3.7 per cent and nearly double the Fed’s two-per-cent target, as “concerning” and said he would be “hard-pressed” to describe current financial conditions as “restrictive”, a potential hint that rate hikes could be on the horizon.
However, he stopped short of saying he would support a hike, adding, “I stand here today committed to a discipline, not to a decision.”
All three main indexes on Wall Street fell on Friday. Yields on short-term US Treasury bonds, which reflect monetary policy expectations, jumped, while the dollar rallied against its peers. Gold, which benefits from lower interest rates, fell.
Asian markets struggled in the morning, but some rallied as the day progressed, leaving some in positive territory and others just below Friday’s close.
Tokyo, Hong Kong, Sydney, Taipei, Jakarta and Mumbai ended lower, while Seoul, Shanghai, Singapore, Bangkok and Wellington rose.
Paris rose at the open, while Frankfurt dipped. London was closed for a holiday.
Focus will now turn to a string of crucial data releases over the next two weeks before the Fed makes its decision, with jobs data due this week and the consumer price index next week.
“Should we get an inline payrolls print that does not give the Fed too much to work with, next week’s core CPI report will become the major decider for the market’s Fed belief system,” wrote Cris Weston at Pepperstone.
“The volatility priced around that outcome across rates, forex and equities could therefore be significant.”
Still, Invesco’s David Chao added, “While Jackson Hole has increased the possibility of a rate hike, I don’t think a September rate hike is in the books.
“Chair Warsh wants to reduce forward guidance, and he stopped short of explicitly signalling a September move. The upcoming inflation and labour market reports will be critically important.”
