Dear Reader,

There’s a traditional British dish of sausages baked into a Yorkshire pudding, called Toad-in-the-Hole. How did it have such an astonishing name? The origin is shrouded in the mists of time, but this article says it’s because, just as we see toads in their burrows with their heads poking out, the sausages poke out through the batter. Toad-in-the-Hole, made with sausages, eggs and flour, is supposed to be comfort food and British schoolchildren were often fed the dish for their mid-day meal during World War 1.

At Jackson Hole, Fed chief Jerome Powell served up warm comfort food for the markets. We could call the delectable dish he served Powell-in-the-Hole.

The Jackson Hole symposium has served as a platform for central bankers to take stock of the economic and financial environment and point to the way ahead. At the 2023 conference, Powell noted that the Federal Open Market Committee (FOMC) was “attentive to signs that the economy may not be cooling as expected’’. At the 2022 Jackson Hole symposium, he scotched all talk of a pivot and said interest rates would be higher for longer.

But times have changed. Inflation is retreating all over the world and yet growth has held up reasonably well. A rare soft landing for the global economy seems to be in the offing. As this FT story, free to read for Moneycontrol Pro subscribers says, markets are betting on a “Goldilocks’’ scenario for the US economy. Gold has hit record highs as investors bet on rate cuts. Even before Powell’s speech at Jackson Hole, the markets had priced in a 25 basis point rate cut in September as a done deal, all the more so after the dovish minutes of the last FOMC meeting. But the Fed Funds markets had also priced in a two-thirds probability that the policy rate would be 3.75-4 percent or below by March 2025, at least 150 basis points lower than the current rate. It was on the long-term trajectory that the markets hoped Powell would provide more clarity.

The panic in the markets over the last US jobs report has died down, but investors are keeping a sharp lookout over signs of a cooling labour market, as this FT story pointed out. Of course, there’s a huge question mark over the quality of the payrolls data, with the US Labour Department revising 12-month job growth down by a massive 818,000 jobs. With those kinds of revisions, being data-dependent, as the Fed has always insisted it is, takes on a whole new meaning.

Nevertheless, the focus has shifted from inflation to growth and the labour market. The US Flash PMI report for August said that while “average prices charged for goods and services rose at the slowest rate since June 2020 barring only the recent dip seen in January”, job losses are going up. It said, “Net job losses have now been reported in three of the past five months, marking the softest spell of payroll growth since the first half of 2020.’’

And then there’s Japan. With retail inflation inching up in that country, Bank of Japan Governor Kazuo Ueda on Friday reiterated his resolve to raise interest rates, although he also said, "Markets at home and abroad remain unstable, so we will be highly vigilant to market developments for the time being." Japan’s Flash PMI for August showed that business activity rose at its fastest pace since May 2023.

Given this background, what was the message Powell delivered from Jackson Hole? He has come full circle from his 2022 Jackson Hole speech. In 2022, he had given a clear indication that he would raise rates, this time he was crystal clear that the time had come to cut rates. He said he was confident that inflation is on a sustainable path to 2 percent; that the balance of risks had changed; that the labour market had cooled considerably and that it was unlikely to be a source of inflationary pressures; that the Fed did not seek or welcome any further cooling of the labour market. He talked of dialling back policy restraint and said that the time has come for policy to adjust to the changed situation and he said he would do everything to support a strong labour market. In short, he has signalled the beginning of rate cuts. To be sure, he said "the timing and pace of rate cuts will depend on incoming data, the evolving outlook, and the balance of risks’’, but he also said the direction is clear.

It was a clear announcement of a pivot. The markets reacted predictably, with stocks rising, bond yields falling, and the Vix and USD weakening. At the time of writing, the Japanese Yen was back to around 145 to the dollar.

It’s clear that the Fed’s new worry is not inflation but rising unemployment. That is why the probability of a 50 basis point rate cut in September went up to about a third after the speech. Also, the probability of the policy rate being 3.75-4 percent or below by March 2025 after the speech went up to almost 80 percent.

Back home, Powell’s confirmation of the Fed’s regime change should be good news for emerging market equities. But the RBI has so far refused to signal that it sees inflation on a sustainable path down to 4 percent. In fact, the minutes of the last meeting of the Monetary Policy Committee laid bare the dissensions within it. The argument of those who wanted a rate cut was that while economic growth in India was strong, it was below its potential and real rates were too high. But RBI Governor Shaktikanta Das’s level-headed, practical opinion was that “Policy making in the real world cannot be based on an abstract, theoretical and model specific construct which is unobservable and time varying. Hence, any justification for policy easing based on so called high real rates can be misleading.” A study in the RBI Bulletin put rate cuts at the mercy of food inflation. The HSBC India Flash PMI report for August said the latest increase in selling prices was solid and above its long-run average, despite softening since July while growth was robust.

For the Indian equity markets, as Sanjeev Prasad, MD, Kotak Institutional Equities, said in this interview with Moneycontrol Pro, “The question is not whether India will do well in terms of consumption and investment, but how much one should pay for future growth.’’ The problem, he said, is that “the conclusions many investors have drawn from their recent investment experience are 1) one will always make money in the market and never lose money, (2) one will make large returns in the market at all price points and 3) one will make even larger amounts of money in mid- and small-cap stocks at all price points’’. Nevertheless, he also said there were no imminent risks to the market. My colleague Madhuchanda Dey wrote, “The India growth story warrants a buy on decline rather than a sell on rally.’’ Jerome Powell’s speech should lead to a strengthening of the risk-on sentiment in Indian markets too.

And finally, if you would like to cook Toad-in-the-Hole, here’s the recipe. Other iconic British dishes you may try include Bubble and Squeak, Bangers and Mash, Angels on Horseback and Spotted Dick.

Bon Appetit,

Manas Chakravarty

Here, in case you missed them, are some of the stories and insights we published this week, apart from our technical picks in the equity, commodity and forex markets:

Stocks

Endurance Tech, Krsnaa Diagnostics, Zomato, A unique play on health insurance, IRCON International, Cyient DLM, Nazara Technologies, Gabriel India, Royal Orchid Hotels, Balaji Amines, Apeejay Surrendra Park Hotels, CMS Info Systems, Interarch Building Products IPO, IRCTC, Medi Assist, KEC International, Voltas, CDSL, Defence Shipbuilders

Markets

Is a high cash pile by funds a good thing for investors?

It’s time for traders to tweak their tools for a market that’s in rude health

Growth takes priority for retail investors over quality

How Technology has transformed the trading landscape

Financial Times

Gold and the dollar

Whatever happened to the wisdom of the bond market?

AI-powered coding pulls in almost $1bn of funding to claim ‘killer app’ status

Start-up failures up by 60% as founders face hangover from boom years

The global power of Big Agriculture’s lobbying

Companies and sectors

Earnings upgrade momentum weakens for FY25

Real Estate: A pause after breathtaking rally or a trend shift?

Zomato-Paytm deal

Early RBI warnings on top-up loans are fair, but LAP is the real worry

RBI presses warning button on P2P lenders

Imports playing bigger role in aluminium consumption

Large hospital chains withstand seasonal slowdown better in June 2024 quarter

Demand boom drives new home launches from realty firms

Can banks hit the jackpot as private capex increases?

Economy & Policy

Monsoon Watch

Not only senior citizens, but all bank depositors have the right to full insurance cover

The India growth story needs more white collar jobs

What does the core inflation pattern tell us?

Is there really a structural change in bank deposit growth?

Government U-turn on lateral entry

Why Vietnam is gaining in the FDI sweepstakes and the lessons for India

Is India’s medical delivery fit enough to take on an Mpox outbreak?

Pro Economic Tracker

Why India's bank credit to GDP ratio is low

Markets’ faith in RBI forex intervention

Tech & Startups

BookMyShow vs Paytm and Zomato: The going-out business is set for an intense battle

US antitrust ruling against Google should be a warning shot for Indian monopolies

Startup Street: WazirX hack: socialising losses and short-changing of customers

IBM, Fujitsu, Oracle build next-generation infrastructure to accelerate Gen AI, cloud adoption

Personal Finance

Factor index funds: Why a smart combination can help outperform plain-vanilla indices

Your personal inflation is much higher than CPI

Politics and Geopolitics

Public outrage at the Kolkata hospital rape and murder throws a challenge to Mamata Banerjee

New govt faces both economic, geopolitical challenges in Bangladesh