It never ceases to amaze that the most important decisions – the ones that affect everyone on the planet – are often taken in the smallest towns and remotest resorts.
The Mount Washington Hotel in Bretton Woods, New Hampshire, USA is one that springs to mind.
It’s in the middle of nowhere.
It was a run-down hotel that had been closed in 1942.
But it came to prominence again in 1944 after the hotel was renovated for the meeting of the 44 Allied nations which became known as the Bretton Woods Agreement.
Signed in 1944 during the Second World War it put the US dollar at the centre of world trade.
This was a pivotal moment in 20th century history, one which is key to understanding the world to this day.
Jackson Hole, also in the United States, is another such place. It too is in a remote part of Wyoming. The surrounding countryside is spectacular, but it is otherwise an unremarkable place, made famous only by it being an important part of the fur trade in the 1820’s.
It stayed off the radar until 1920, when it elected an all-women city government. Talk about it being well ahead of its times!
Otherwise it remained an unremarkable place until the Federal Reserve showed up.
The Federal Reserve Bank of Kansas City used it for its first “World Economic Trade” symposium. This would have garnered some passing interest. But in 1989, Alan Greenspan showed up, the then Chairman of the Fed. And so, began the tradition of the Chairman attending each meeting, one that lasts to this day.
And because the Federal Reserve Chairman is present at these meetings, the entire world watches what happens at Jackson Hole during these symposia.
So, onto the 27 August 2020 Jackson Hole address.
And why Jerome Powell’s speech, potentially, could mark the end of recession in the United States.
From a Yahoo Finance report on the speech.
“The Treasury yield curve steepened to the widest in two months after Federal Reserve Chairman Jerome Powell announced a shift to a more relaxed approach on inflation.
Powell said Thursday that the central bank will seek inflation that averages 2% over time, a level official’s have failed to attain consistently in recent years. He said the move reflects “our appreciation for the benefits of a strong labour market, particularly for many in low- and moderate-income communities.”
In effect, the hard ceiling of 2% inflation has effectively been shattered.
The US Fed will now happily allow inflation to go higher than that, but with the caveat that it ‘averages’ 2% per annum going forward.
The fallout was immediate.
Long dated bonds, like 30-year Treasuries, sold off, and as the increased selling forced the price down, yields rose past 1.51%.
Rising inflation affects long dated bonds the most.
Could this be a signal about the future of US Fed bond purchases? We will have to wait for future announcements on that front.
But for bond traders, the message was clear. Start steepening the yield curve.
But there was another subtle message in that speech too; did you notice it?
Benefits of a strong labour market
So, what is the outlook for employment in the US now?
Data showed the US added 428,000 new private sector jobs in August. Forecasts were for 900,000. The good news is the July figure was raised to 212,000 from an initial 167,000. The forecast then was for 1.9 m.
You can take for granted the Fed had this news early.
The Fed is nailing its mast to rising job numbers to create wage inflation.
So, let us recap.
• US Fed will tolerate inflation over 2% without necessarily lifting rates
• US employment numbers indicate that inflation may be wage inflation
• Bond traders are on notice that they will be supported to steepen the yield curve
Now consider that we are right in the middle of the mid-cycle recession of the current real estate cycle. Historically a confusing and fluid time.
The Property Sharemarket Economics team (PSE) have designed our own set of indicators including purpose-built charts and datasets that you will not find anywhere else.
The indicator report for July 2020 includes commentary about the US yield curve for 2020.
Here is a sample, exclusive for PSE subscribers that was written in July.
“We note with interest that the effective rate has now increased slightly to 0.09% at the end of July. Should this trend continue it would mean the yield curve is slowly starting to steepen meaning turning positive”
“It is possible the rising effective rate speaks of confidence amongst US banks to lend to each other to pursue such buyouts. Should this continue, albeit slowly, and lending more broadly can increase, then the groundwork laid by the US Fed to encourage economic growth may bear fruit”
This explains the desire of the US Fed to see the curve steepen further.
So, what happens exactly when the curve steepens?
The PSE team know, and it is NOT what you expect. It is all dictated by the land cycle, which PSE specialises in understanding.
And we know from our study of history that it is definitely not what the US Fed expects either.
PSE Subscribers can access their monthly indicators report to understand these longer terms trends for both the United States and Australia.
If you too wish to have access to this data click HERE now.
and your Property Sharemarket Economics team.