Thoughts Post-Jackson Hole

With the central banking symposium at Jackson Hole coming to an end, Livewire, one of Australia's leading financial news platforms, was kind enough to ask us, as well as analysts from BT Financial Group, JCB, Morphic and Nikko Asset Management for our views on the event, and the implications for monetary policy going forward.

We discussed the impact of Jackson Hole on the precious metals market, and why we haven’t been surprised to see the market pull back in the last few weeks – as well the outlook for the Australian dollar.

We’ve also included some thoughts on the latest economic data out of Australia, as well as access to our latest technical report.

Livewire Live Questions

1. From your perspective what was the most interesting theme that has emerged from the symposium?

Whilst the shorter-term focus will be on potential rate hikes between now and the end of the year, the bigger picture issue is the tool kit at the Fed’s disposal, both now and into the future. On that note, one of the more interesting developments was the clear reticence from the Fed to move toward negative rates, something that their counterparts in Europe and Japan are obviously more comfortable with.  
 
The fact that Yellen didn’t mention negative rates when discussing steps future policymakers may choose to add to their toolkits (she did mention raising inflation objectives, and nominal GDP targeting for example) was telling. It was also instructive that she touched on fiscal policy, and the manner in which productivity can be enhanced toward the end of her speech, with a specific mention of how important the latter is to any potential improvement in living standards going forward.
 
We couldn’t agree more with her sentiments, and Yellen is not alone in drawing attention to the fact that the various agencies of government itself need to help fix the core issues that continue to plague the global economy.
 
After all, whilst there is an ongoing debate as to whether or not there is a lower limit on where nominal rates can go in the developed world, markets are increasingly realizing that there is an upper limit on just how much monetary policy can achieve.

2. What are the implications of this theme on the assets you seek to invest in? 
Precious metals are my main focus, and short-term I’m neutral with a downside bias, a position unchanged from our pre-Jackson Hole outlook here at ABC Bullion, where we thought the metal might ease somewhat, with stronger support closer to USD $1300 per ounce.
 
The greater focus on a potential rate hike in 2016 that has come out of Jackson Hole reaffirms this view, as has a stronger US Dollar index, which has been rising since late June. In saying that, we think downside for gold and silver will likely be limited from here, especially for Australian dollar investors, with the local currency under pressure.
 
Soft retail sales and CAPEX data in Australia this week (more on that below), which will do nothing to change the lower trajectory for Australian interest rates, reinforce the likelihood of a lower Australian dollar, with rate differentials between Australia and the United States likely to narrow further over the next 12 months, possibly to zero.
 
As for what happens next with the USD gold price – obviously it’s all eyes on the non-farm payroll report which will be released tonight. If it's a strong one (the market is only expecting 180,000 jobs), then it would strengthen the chance of a September rate hike – though we think it’s unlikely.
 
Overall data is still soft, evidenced again overnight with construction spending figures out of the USA showing no growth at all, whilst some of the PMI results were soft too. Headline unemployment rates may look healthy, but they have ceased to be a meaningful representation of the health of the underlying economy, something that we think the Fed is well aware of.

3. What trajectory do you expect US rates to take over the next 12-24 months? Have your expectations changed on the back of the symposium? Explain.

On nominal rates alone, I’m more hawkish than I was, though I still don’t expect them to head much higher than 1% before the Fed changes course, a view more in line with the market than the dot-plot, with Fed officials thinking we’ll see rates close to 3% in the next two years.
 
My view on nominal rates is not because I think the Fed or other central banks will meaningfully unwind monetary accommodation in the coming years (quite the opposite in fact).
 
As discussed above though, Jackson Hole re-affirmed the view that Yellen and her colleagues at the Fed clearly do not want to cross the zero bound, a monetary Rubicon that once crossed is not easy to uncross.
 
Therefore, the next rounds of stimulus, of which I expect there to be many, are more likely to be “limited”, or at least heavily focused on a combination of inflation targeting, asset purchases and forward guidance.
 
As per the Japanese experiment, there is no reason to think the Fed won’t end up directly purchasing stocks, corporate debt, etc., and the ever growing chorus demanding fiscal expansion will need a buyer of the debt issuance required for infrastructure spending and the like.

We have no doubt central banks will happily provide the finance required, whilst the market will, for as long as possible, ignore the threat posed by increased annual deficits and ever climbing government debt to GDP ratios, lulled into complacency by the entirely corrupted market signal that is government bond yields.

You can read the report here.

Australian Economy
This week there have been a few important Australian economic data points released to the market, all of which point to a continued period of at best sluggish growth, and a continued decline in real disposable income per capita.
 
These figures included new home sales, building permits figures, private sector credit and the AIG performance of manufacturing index, which recorded a massive decline, driven by weakness in the food and beverage sector, which had seen substantial inventory build ups in the previous months.
 
Retail sales were also soft, with no growth at all recorded in the month of July, continuing the poor results seen in May and June, with department store and household good sales declining, somewhat strange considering the “wealth” effect mainstream economists would expect to see as a result of ever higher house prices.
 
The chart below, which plots year on year retail sales growth in Australia over the last 5 years shows just how cautious the Australian consumer is – no surprise considering sky high private debt levels and non-existent ‘real’ wage growth. 

The other key report was of course the private capital expenditure report, which showed a further 5% decline in real terms, with the decline in mining investment as always the major story.

There was a small glimmer of hope in that the forecast decline in investment for the 2016-17 financial year is now “only” 13%, still a horrible result, though an improvement on the prior 20% decline that was forecast last quarter.  
 
The following chart, produced by the AICD – shows the actual and expected declines across mining, manufacturing and “other”. It is hardly an encouraging example of a “rebalancing” Australian economy.

All of these factors reinforce our view that the Australian dollar will be under significant pressure in the period ahead, and that the RBA cash rate will head below 1% in the coming months and years.

Technical Outlook
Before finishing this market update, we wanted to send a link through to the latest ABC Bullion weekly technical and precious metal positioning report, which you can access here.

Key takeaway is that whilst this short-term weakness may persist – we are still operating within a bullish longer-term framework, a note made with a particular reference to silver in this report.

With that in mind, the sense of dollar cost averaging into the sector would still seem a very sensible way of approaching the precious metal market.

Until next time,
Jordan Eliseo 

Disclaimer
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