Weekly View – The Last Samurai

Polling indicates that President Trump is closing the gap on Joe Biden, but not to any meaningful extent following last week’s Republican convention. Pointers to future economic policy were notable for their absence as Trump and team chose to emphasise law and order. Following the two parties’ conventions, the only thing we can say for certain is that both presidential candidates will pursue “Made in America” policies if elected. With Trump having decisively changed public sentiment regarding China, trade and other tensions between the countries will persist, regardless of the election outcome.

In his address at Jackson Hole, Jerome Powell made explicit the Fed’s move to “flexible average inflation targeting”. Ultimately, this means that when inflation is running persistently below 2%, policies will be applied to bring it above 2% “for some time”. We don’t believe this represents any material change in policy as the Fed has already (unofficially) been in average inflation targeting mode since 2018. But executing on this policy may prove easier said than done. Essentially, the Fed wants to push inflation up by influencing expectations. The Fed’s new policy is a ready indicator of worries about “Japanification” in the US, with interest rates effectively at the zero lower bound. But some would have preferred the Fed to be more ambitious and, we believe the Fed’s enduring dovishness will be mostly reflected in asset prices more than consumer prices.

The resignation of Japanese prime minister Shinzo Abe will result in no shift in policy in the short term, but with elections due next year, together and with a likely change of central bank governor, it will be fascinating to see whether the close coordination between government and the Bank of Japan can be maintained. The future of Abenomics is at stake, and with it the direction of Japanese assets. Some good news came from Europe where Germany revised Q2 GDP upwards, and indications of a strong Q3 rebound emerged. Although Switzerland’s GDP fall of -8.2% in Q2 was the biggest decline since records began in 1980, this was lower than anticipated. We continue to like defensive stocks in Switzerland, where dividends could hold up better than elsewhere.