After a three-week slump, the global stock rebounded last week with the MSCI All Country World Index rising 0.8%. U.S. stocks outperformed following comments from Fed Vice Chair Brainard that acknowledged there are risks associated with overtightening financial conditions. The S&P 500 jumped 2.7% while the NASDAQ surged 4.1%. Overseas, European stocks continued their recent descent – falling another 1.5% - while Japanese stocks squeaked out a 0.1% gain. The 10-year U.S. Treasury yield climbed 12 basis points to 3.31% as investors virtually locked in a 75 basis-point rate hike at the Fed’s September meeting.
American football quarterbacks often use the phrase, “Hut, hut, hike,” to put players on alert that the play is about the start. Likewise, Fed Chair Powell used his Jackson Hole speech on August 26 to tell investors that they should expect more rate hikes. As a result, financial markets are now expecting a terminal fed funds rate of around 4.0% in 2023.
However, investors appear to have been encouraged by Vice Chair Brainard’s recent comments that eventually risks will become more “two-sided.” This is in line with our theory that the Fed’s dual mandates will ultimately become dueling mandates when unemployment starts to rise. We think that any signs of a rollover in the labor market may be the catalyst that finally puts the Fed on hold.