�۶���Ƶ

Podcast: (5 min)
Podcast: Jumpstart your week – the post-Jackson Hole setup in markets (5 min)
Video: CIO Monthly – Kiran Ganesh on the AI rally and navigating market highs (3 min)

What happened?
US equities rallied on Friday, with the S&P 500 climbing 1.5% and the Nasdaq advancing 1.9%, as investors welcomed Federal Reserve Chair Jerome Powell’s remarks at the Jackson Hole symposium. The rally carried into Asia on Monday, with all regional benchmarks rising, although sentiment turned cautious ahead of the US market open as investor focus shifts to NVIDIA's earnings later this week.

Powell signaled that a rate cut may be warranted, noting that current policy could be restraining economic activity, and highlighting rising downside risks in the labor market. In his comments, he acknowledged the impact of tariffs on consumer prices and the “curious kind of balance” in the US labor market as hiring slows amid immigration restrictions. His remarks reinforced expectations for policy easing as soon as September.

Bonds also rallied on Friday, with two-year US Treasury yields falling 10 basis points to 3.69%, and 10-year US Treasury yields falling 8bps to 4.25%. Meanwhile, the US dollar weakened, with the DXY index falling 0.9%.

The speech comes as the central bank faces growing internal divisions and heightened political pressure. US President Donald Trump has spent months lobbying for lower rates, arguing that inflation remains contained, and last week intensified his campaign against Fed officials. Trump called for the resignation of Governor Lisa Cook following unsubstantiated allegations of mortgage fraud, a charge led by Federal Housing Finance Agency head Bill Pulte. Cook, nominated by President Joe Biden, has denied wrongdoing and pledged full cooperation with any inquiry.

This has renewed concerns about the Fed’s independence as Trump continues to push for more rate-cut-friendly appointments. Meanwhile, following Governor Adriana Kugler’s resignation, Senate Republicans are rushing to confirm her replacement, CEA Chair Stephen Miran, in time for the September Federal Open Market Committee (FOMC) meeting.

The Fed’s next steps remain in focus as investors are closely watching for signs of further policy shifts as the central bank navigates a challenging economic and political landscape.

Markets have focused on Powell’s emphasis on employment risks, with fed fund futures early Monday indicating an 87% probability of a September rate cut—up from 72% prior to his speech.

What do we think?
With the Fed facing a complex backdrop of gradually rising inflation, weakening labor demand, and slower economic growth in the US, we see several factors converging to support the case for policy easing.

Inflation is expected to rise at a modest pace as tariffs feed through to higher prices. July’s consumer inflation rose at the fastest pace this year, and wholesale prices posted the largest monthly increase in three years. However, slowing shelter inflation, cautious consumer spending, and a softer economic backdrop should help offset some of the impact.

Labor market weakness should justify a fresh round of easing, as Powell has emphasized that conditions could deteriorate quickly if layoffs begin to mount. While the unemployment rate remains low, recent data point to softer labor demand, and the latest Fed meeting minutes suggest officials expect the jobless rate to rise above their estimate of the natural rate by year-end and stay elevated through 2027. With the labor market cooling, we believe downside risks to employment are likely to outweigh lingering inflation concerns in the Fed’s decision-making.

Meanwhile, economic growth risks are becoming an increasingly important consideration for the Fed. US GDP growth remains subdued, with the economy expanding just 1.2% in the first half of the year, well below trend and last year’s pace, with activity likely to remain soft. We estimate that tariffs will ultimately reduce US GDP growth by about one percentage point.

Political pressure on the Fed, including recent calls for the resignation of Governor Lisa Cook, has raised concerns about central bank independence. Legally, a Fed governor can only be removed for cause, such as proven misconduct, not for policy disagreements. We believe that Powell will serve out the remainder of his term, which ends in May, but Cook could be more vulnerable. Threats to the Fed’s independence add to its difficulties as it navigates a challenging economic and political environment.

Soft landing rate cuts have historically been positive for stocks, and the Fed’s shift from restrictive to more neutral policy should help extend the bull market, even if earnings growth for cyclicals remains uneven. Within cyclicals, high-beta and lower-quality segments, including small caps, may have further room to run, but we remain selective. We favor areas like US financials, especially banks, where valuations and fundamentals are more compelling. We see room for the equity market rally to continue, with the S&P reaching 6,600 by year-end and 6,800 by June 2026.

So, we expect Powell to advocate for easing at the September meeting unless incoming data, such as a strong August labor report or higher-than-expected inflation, provide reason to stay on hold. Against this backdrop, we anticipate four quarter-point rate cuts through January 2026, starting in September.

How to invest
Put cash to work. The time to put cash to work is now, as the Fed looks set to resume rate cuts in September and rates in much of Europe are already low. To achieve alternative sources of portfolio income, we see quality bonds such as high grade and investment grade as appealing. We believe investors should focus on medium-duration bonds, as longer-duration bonds may face risks from fiscal policy, questions around the Fed's independence, and upcoming inflation prints.

Buy dips in equities. Global equities remain resilient, recently reaching record highs, and we expect further upside over the next 6-12 months based on Fed easing and strong capex momentum. Investors underallocated to equities should consider phasing in and using market dips to add exposure to preferred areas. Alongside AI, power and resources, and longevity, we favor US tech, health care, utilities, and financials. In Europe, we like Swiss high-quality dividends, European quality stocks, European industrials, and our “Six ways to invest in Europe” theme. In Asia, we prefer China’s tech sector, Singapore, and India. And we see opportunities in Brazil.

Navigate political risks. Gold remains an effective portfolio diversifier and a reliable hedge against political risks, in our view. Weakening US economic data, potential US rate cuts, fears of higher inflation, worries over the Fed's independence, and persistent geopolitical risks continue to support the metal. We recently raised our price target to USD 3,700 per ounce by end-June 2026 and see scope for even higher prices if political or economic risks escalate. Capital preservation strategies and certain alternatives strategies can also help diversify portfolios against political risks.

Reduce excess dollar exposure. After a brief rebound, softer US economic data has led the dollar to relinquish recent gains. Looking ahead, we expect further weakness in US GDP growth, Fed rate cuts, and persistent twin deficits to weigh on the greenback for the remainder of the year. While high interest rates make hedging dollar exposure expensive, we recommend that investors review their currency allocations to ensure they match future liabilities and spending needs.