Jackson Hole in the sky

Jackson holeJackson hole

Christian Gattiker, Head of Research, Julius Baer │It is about time: central bankers present their take on the current mess at the Jackson Hole meeting, the prime plat-form for this. The more concerned they are the better. We think concerted central bank action will still avoid a global recession. Warming up to fiscal easing, as in Germany, is the icing on the cake.

Investor sentiment soured first this summer, now technical readings follow. Last week showed some signs of oversold conditions in many risk assets. Of course, there is a fundamental backdrop to this. The growth concerns are justified, as the situation around global trade is serious and there are plenty of geopolitical hotspots. One of these blowing up would certainly aggravate the situation. What we have learnt from past economic dents is that we should never underestimate the sentiment in the economy. When producers and consumers feel threatened, they tend to defer producing and buying. This then leads to a major slowdown.

Over past weeks, financial markets have panicked with this scenario in mind, but the good-old rule of thumb still applies: markets panic until politicians panic. And now we see a sense of fear spreading in this arena too. The deferral of tariffs on some Chinese goods by the US could be seen as a first sign. On the monetary side, a reaction usually takes longer. However, this week central bankers are in the spotlight. China has already delivered its offering.

At this week’s annual Jackson Hole meeting, the others will be asked about their stance on crisis fighting. Another rule of thumb is that no one wants to hear central bankers being bullish on the economy. However, the truth is rather the opposite: the more concerned bankers are, the more they prepare for action. A valid concern, of course, is that monetary policy could turn dysfunctional. Therefore, signs of fiscal easing are paramount for growth. Germany warming up to easing shows the way. For those in disbelief about the Germans abandoning their obsessive break-even budget, I have one observation: the market is looking for these signals and will have priced them in way be-fore the 2020 German budget is hammered out. But for now: central banks first, fiscal spending maybe later.

Given the oversold conditions, traders may want to pick up beaten-down assets such as technology, China and many cyclical issues.