As we noted last week, global equity assets performed strongly this week, with gold hitting new highs and bond markets remaining remarkably stable. After a rapid adjustment, the global bond market has now entered a bottleneck period, indicating that uncertainties surrounding economic growth and inflation levels in the near future are diminishing. This trend is favorable for overall asset price appreciation. Despite a minor pullback in equities during the trading days this week, the overall market was on an upward trajectory, particularly in Europe and Japan. Digital currencies also saw significant gains due to increased liquidity.
Throughout the week, various European PMI data were released, which generally showed weakness. This continues to reflect the restrictive impact of high interest rates on manufacturing. However, global capital expenditure shows no signs of retreat, and international trade in semiconductors remains robust. Nvidia’s announcement of a one-month delay in the release of its Blackwell chip calmed market nerves, leading to a strong rebound in the semiconductor sector, with Nvidia leading the charge. The market has now moved past the signal of Buffett selling Apple stock.
On Friday, Powell’s speech at the Jackson Hole symposium captured the attention of global capital markets, signaling the end of the recession trade logic. This meeting was not just a gathering for traders but a feast for macroeconomic enthusiasts. As Powell put it, while we won’t assess or analyze the causes and transmission mechanisms of the recent bout of inflation today, countless studies will emerge in the future, particularly in the next generation, to more thoroughly evaluate this period.
The uniqueness of this meeting lies in the fact that the Federal Reserve’s monetary policy framework undergoes a comprehensive review every five years. It has been over four years since the introduction of the average inflation targeting framework around 2020. Powell used this speech to provide a summative assessment of this framework, covering supply, demand, and market expectations. Implicitly, he expressed confidence in the framework’s ability to achieve a soft landing for the economy and maintain long-term inflation stability. Powell also acknowledged the significant challenges posed to the Fed’s monetary policy by the recent volatile inflation and stressed the need for humility in facing unknown risks. He conveyed confidence in managing inflation and labor market risks, though, as expected, he provided no concrete guidance on the future pace of rate cuts. The market will likely digest this optimistic speech over the next one to two weeks, with August’s CPI data playing a crucial role in determining whether a 25 or 50 basis point rate cut occurs in September. The stock market should remain positive until the CPI release, with risks emerging if the data falls short of expectations for a 50 basis point cut, potentially leading to market turbulence.
In Japan, the stock market staged a strong rebound, and the foreign exchange market stabilized. However, after a decline, the Japanese bond market began to rally again. Following the recent shocks from carry trades, it’s essential to monitor Japan’s bond market, particularly the pace and rhythm of the upward movement. As long as there is no upward pressure on bonds, market sentiment should remain positive. But as bonds approach resistance levels, we should consider reducing risk exposure.
This week, Kazuo Ueda testified at a parliamentary hearing, echoing the stance of the Deputy Governor of the Bank of Japan, while emphasizing the positive significance of normalizing Japan’s monetary policy. This is beneficial for Japan’s long-term inflation expectations. Given the strong growth in Japan’s export data, we believe the Japanese stock market remains an attractive investment. Japan is not facing self-induced recession risks; instead, it faces financial stability pressures stemming from international capital flows. Ueda noted that the effects of corporate salary adjustments in Japan are still unfolding, indicating that inflation is likely to continue its upward trajectory in the near term. If Japan’s August CPI continues to rise in line with the U.S. CPI, we can maintain a bullish stance on the Japanese stock market.
Domestically, “Black Myth: Wukong” has emerged as a truly high-value product, breaking into international markets based on product strength alone. As the game’s popularity rises, sales are expected to increase further, boosting certain Chinese stocks. However, for China’s broader macroeconomic landscape, this success holds more symbolic value. The journey of Game Science, the developer, is a testament to the possibility of achieving the success of Western startups in China. This year, major enterprises behind platforms like Wenxin Yiyan and Doubao have not been able to match the competitiveness of smaller teams like those behind Kimi and “Wukong,” which have achieved such success without significant capital accumulation. China’s business model is undergoing a transformation, and while there are always those who rise to the challenge of fate, we need more such innovators. We hope this spirit of breakthrough innovation will soon emerge in the financial sector.