Powell’s Pretense

A look at the day ahead in US and global markets by Mike Dolan.

With just four hours to go before Jerome Powell takes the podium in Jackson Hole, all the ifs and buts have been discussed and the last-minute market positioning is done and dusted.

The only remaining concern is that it might be a wet dump.

The head of the Federal Reserve delivers his much-anticipated speech at 1000 EDT. (1400 GMT)

But the flurry of comments and interviews from his Fed colleagues over the past 24 hours has left markets with little news to chew on about the policy trajectory.

Interest rate futures are falling to the bottom with a much more hawkish bias compared to early August, putting the Fed’s top “terminal” interest rate early next year at around 3.8%. However, it is still below the 4% ceiling they expected in mid-June and there is still at least one rate cut between then and the end of 2023.

Powell is unlikely to be specific about next month’s decision, preferring to wait for crucial jobs and inflation data before then. A July easing of the Fed’s preferred measure of inflation – the key measure of personal consumption spending – will likely be seen before it speaks later.

That said, futures are again leaning toward a 60% chance of another 75 basis point hike in the September session.

One possible focus is that Powell avoids detailed guidance on “peak interest rates” but stresses that they are unlikely to be cut at all next year. Any finer points in the Fed’s balance sheet review will be confirmed, with some analysts now fearing that lingering assumptions about the pace of so-called “quantitative tightening” could deplete commercial bank reserves too quickly in any sharp slowdown next year.

Even as bond markets wobbled and the dollar climbed in anticipation of the speech this week, Wall St stocks appeared less bothered – posting their best one-day rally in two weeks on Thursday and with stock futures holding on to those gains today.

While Bank of America’s weekly investor flow tally shows a further outflow from most asset classes and the overall position is still in “maximum decline”, financial stocks stood out this week with their biggest inflow since January.

Aside from Powell, global markets focused Friday on the deepening European energy crisis and China’s latest stimulus plans for infrastructure spending. Copper prices hit a two-week high.

But it’s going to be a cold winter. Describing it as a “crisis”, UK regulators announced that household energy bills will rise by 80% a year from October. Rising energy bills also pushed German consumer confidence to a record low for a third straight month.

Brent crude, so central to inflation and the central bank’s narrative this year, pared this week’s gains at $100 a barrel – largely on fears that OPEC will cut output if a nuclear deal drives the Iranian slow back to global markets.

From last year’s Jackson Hole… https://fingfx.thomsonreuters.com/gfx/mkt/zjpqkbrempx/One.PNG

A Quick Trip to Neutral A Quick Trip to Neutral https://graphics.reuters.com/USA-ECONOMY/POWELL/zdvxogolapx/chart.png

Key developments expected to give more direction to US markets later on Friday:

* July US Personal Consumption, Core PCE Price Index

* US July Advances Trade Balance

* Final reading of Michigan’s US consumer sentiment index in August

* Fed chief Jerome Powell speaks in Jackson Hole at 14:00 GMT

(By Mike Dolan; Editing by Kim Coghill mike.dolan@thomsonreuters.com. Twitter: @reutersMikeD)

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