08/26/2024

The Jackson Hole Economic Symposium hosts dozens of central bankers from around the world at its annual economic policy symposium. The participants convene to discuss global economic trends and prospects. Last Friday, Federal Reserve Chairman Jerome Powell acknowledged that the current situation is much more favorable than at any other time since the pandemic.

Although the participants at the event were cautious and avoided openly declaring victory over inflation, the fact is that the fear of inflation has subsided. As a result, global monetary policy must start its easing cycle, which leads us to a scenario of lower interest rates. As Powell stated in Jackson Hole, the direction of travel is clear, and there is little uncertainty about the next steps of the main central banks: both the Fed and the ECB will cut interest rates by 25 basis points in September.

The Federal Reserve Chairman also confirmed that the US economy is growing fast, dispelling recent concerns of recession. However, what really attracted investors' attention was the emphasis on the cooling of the labor market, suggesting that the Fed is prepared to do whatever necessary to prevent a sharp economic slowdown. In short, nothing in Powell's speech aroused concerns in the market: he announced a rate reduction in September, leaving the door open to a faster monetary easing path if necessary, and endorsed a soft landing in the business cycle.

In Europe, although there is no doubt about maintaining the cycle of interest rate cuts, the discourse is a little different and the fight against inflation remains. The European Central Bank chief economist Philip Lane stated that the European Central Bank is making "good progress" in cutting inflation back to its 2% target, but success is not yet assured. As a result, a restrictive monetary policy is still needed. The fact that Europe is perceived to be experiencing an economic recovery rather than a slowdown and that the unemployment rate remains close to all-time lows, probably explains to a certain extent this difference in discourse between the Fed and the European Central Bank.

Monetary visibility, however, contrasts with a situation of political uncertainty. In the United States, the presidential race is still tight. Harris currently leads in the average national surveys by 1.5 percentage points, but this is within the survey's margin of error, and some indicators have recently been leaning back in favor of Trump. After the Democratic National Convention, Harris can enjoy a certain rally in the polls, but history tells us that this momentum will not last more than a few weeks. The presidential debate on 10 September is now emerging as a key event.

In Europe, Germany and France are likely to dominate the political headlines. In Germany, the polls in the regional elections in Saxony and Thuringia on 1 September suggest a defeat for the three parties that make up the federal government, which puts additional pressure on the already weak coalition in Berlin. Meanwhile, in France, President Macron has started to consult political leaders to appoint a new prime minister, a very complicated process given the country's deeply fragmented parliament.

And politics are now joined by geopolitics. During the weekend, Israel launched a preventive attack on Hezbollah's positions in Lebanon. The Israeli army defended the attack as an act of self-defense, claiming that Hezbollah was planning to launch rockets and missiles toward Israel. Hezbollah announced the launch of 320 rockets against at least 12 Israeli military positions and bases.

In short, the current monetary peace of mind contrasts with a political and geopolitical reality that is not likely to give us much respite in the coming weeks. Given this situation, as always, we advise our customers to diversify their investments and to commit to a long-term investment horizon.

We hope this report was of interest to you. Thank you for listening to us.