Financial markets brace for ‘very aggressive’ Jackson Hole speech from Fed’s Powell

Financial markets are gearing up for Friday’s much-anticipated Jackson Hole speech by Federal Reserve Jerome Powell and expect it to signal the continued need for aggressive rate hikes to fight inflation despite risks to economic growth.

That’s the general consensus among analysts, economists and investors ahead of Powell’s remarks, a day after former Minneapolis Fed hawk Neel Kashkari said the central bank should go ahead with tightening monetary policy until inflation clears up. moves down.

Although US stocks have the DJIA,
+0.18%

SPX,
+0.29%

comp,
+0.41%
posted gains to finish higher on Wednesday, struggling for momentum after Tuesday’s comments from Kashkari. Stocks retreated from their summer rally last week as Fed officials reiterated their pledge to reduce inflation to 2 percent, even with signs the economy is slowing and despite a surprise drop in the U.S. consumer price index in July.

Bond yields rose to two-month highs on Wednesday in anticipation of aggressive Fed action next month, and equity futures investors returned to pricing in a more than 50% chance of a 75 basis point hike in September. Such a move would be the Fed’s third consecutive rate hike of this size and the fifth increase overall since the central bank’s rate hike campaign began in March.

“The market is looking for a very aggressive tone from headquarters,” said Deutsche Bank’s Tim Wessel, Jim Reid and Henry Allen.

Hopes that the Fed could ease back on its aggressive rate hikes emerged on Tuesday after a round of disappointing US data that included a dip in new home sales for July. But those hopes have begun to fade, even as well-known analysts such as Goldman Sachs economist Ian Hadjius still see a chance that Powell will support slowing the pace of rate hikes. JPMorgan Chase & Co’s Phil Camporeale also questioned why Powell should be overly bullish this week.

Here is a summary of the views:

“Hawkish shock”

“The case where a hawkish shock is going to come is that the President most of the time has to speak publicly on behalf of [policy-setting Federal Open Market] Commission, and this is his opportunity to turn his remarks toward his own personal bias,” Deutsche Bank’s Wessel, Reid and Allen wrote in a note on Wednesday. Powell “may well personally weigh the balance of risks toward worse inflation outcomes, but let’s see if his sensitivity is strong enough to satisfy market appetite.”

Preparation and compensation

The Minneapolis Fed’s Kashkari “raises the forecast for inflation aggression,” a sign that the Fed’s communications “are intended to prevent easier economic conditions from prematurely undoing the Fed’s work,” said Ben Emons, CEO of global macro strategy by Medley Global Advisors. in New York.

“The S&P 500’s 100-day moving average is at 4090, the likely next support zone,” Emons wrote in a note. “Call and put options with 4090 strike expiring 8/31 are now priced at nearly equal volatility. It reflects a market primed with arguments for an aggressive pitch, while at the same time countering calls for a casual slant.”

“Hazard” with a half-point hike

“Powell’s performance will convince the public that the Fed is serious about tackling inflation under its dual mandate,” said economist Derek Tang of Monetary Policy Analytics in Washington.

“We still think September will be 75 instead of 50,” followed by a drop to 25 basis points from November, Tang wrote in a note. The “risk” with a 50 basis point hike in September “is that it cuts off the right tail of 2022 results too soon, when the FOMC tries to convince the market of both a higher terminal rate and a subsequent easing cycle. “

The hiking cycle is not over

“It’s safe to assume that one of Powell’s goals will be to communicate that there is still work to be done to fight inflation and that the hiking cycle is far from over,” said BMO Capital Markets strategists Ian Lyngen and Ben Jeffery.

“On that note, Kashkari’s comment that it is ‘very clear’ that the Fed needs to tighten monetary policy certainly resonates, and we expect this to be just the beginning of a series of such official headlines – most of which will happen the trading week is coming to an end,” they wrote in a note.

Not so fast

“I think he will make a case, as he did in his last press conference, for slowing the pace of hikes,” said Goldman Sachs’ Hadzios.

“We had two moves of 75 basis points. Our expectation would be, barring any significant data surprises, that September’s move is 50,” Hadjius said on Bloomberg Television’s Surveillance on Tuesday. “I don’t think he’ll be specific on the number, but I think he’ll say there’s a risk of over-tightening and so it makes sense to go a little bit slower than the oversizes are growing.”

Sticking with hawkish rhetoric

“Markets sold off in anticipation of President Powell’s opening address at the Jackson Hole conference on Friday. The thinking is that it will strongly reiterate the Fed’s commitment to reducing inflation and perhaps signal that big rate hikes will continue for the next couple of meetings,” said Tom Graff, chief investment officer at Baltimore-based Facet Wealth. “That view has been the main driver of the sell-off in stocks as well as the jump in interest rates in recent days.”

“It is incredibly important to reestablish the Fed [its] reputation for price stability,” Graff wrote in an email. “As a result, it will send the same message it did to the July FOMC, even if they start considering a pause early next year. They will continue with this hawkish rhetoric until they are 100% sure it is time for a break.”

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