Daily Market Commentary 28th August 2020

The Federal Reserve addressed markets from the ‘Virtual Jackson Hole Symposium’ for Central Bankers. Chairman Powell announced changes to the ‘Long-Run Goals on Monetary Policy strategy’ with a new ‘average inflation targeting’. This questions the long accepted tenet that ‘low unemployment drives inflation’ and utilize interest rates to address this function. It was not a break so much as allowing flexibility in monetary policy action. The Fed would allow inflation to rise above the targeted 2%, for an extended period, while targeting the lower income spectrum of employment. Equity markets loved this green flag for lower interest rates for an extended period, lead by strong rallies from the banks.

US GDP was reviewed up from the record lows, in the last quarter, falling from a contraction of 32.9% to 31.7%. Kansas City Fed Manufacturing Index rose to 23, while US Pending Home Sales rose 5.9%. Equity markets rallied strongly on the news, while the currencies were steady, with the EUR trading 1.1820, while the GBP held 1.3200.

US/China Trade developments have encouraged the commodity currencies to rally, with the AUD rising above 0.7250, while the NZD broke above 0.6650, but retreated later in the nights trade. US/China military tensions in the South China Sea sparked up, while at the same time the trade tensions, have been addressed. This virus continues to wane in importance to markets.