How markets could react to Powell at Jackson Hole
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Investors are hoping Fed chair Jerome Powell will validate recent market pricing for interest rate cuts in his Jackson Hole remarks Friday.
Why it matters: If Powell is hawkish, or focuses on inflation risks more so than on cracks in the labor market, investors could be caught off guard.
What they're saying: "We believe Powell will have difficulty communicating an explicit intention for the September meeting at Jackson Hole because the August payrolls data will be unavailable. This, we think, should surprise the markets hawkishly," according to a note from Calvin Tse, head of Americas macro strategy and US economics at BNP Paribas.
Zoom in: To understand how markets may respond to Powell, it's helpful to understand what investors may be expecting next month. Here are three potential scenarios, according to Tse's note.
- A September interest rate cut, cemented by signs of increasing weakness in labor market data.
- A September cut, accompanied by Powell changing his thinking on what would necessitate lower rates.
- A potential half-point reduction by the Fed even while pricing in a quarter point cut.
Between the lines: Markets are likely banking on the second scenario, the note said.
- In the last Fed meeting, Powell reiterated his focus on year-over-year inflation data as measured by the Personal Consumption Expenditures price index (PCE), as well as the unemployment rate.
- By that framework, the Fed should not be cutting just yet. Inflation is still above the Fed's 2% target, and unemployment has not skyrocketed.
- But at Jackson Hole, investors are looking for any clue that Powell's framework may be changing to accommodate cuts.
Be smart: Markets have stuck to pricing in a quarter-point rate cut for September despite recent upside surprises in inflation data.
- If investors are expecting the head central banker to change his playbook, they may be disappointed, according to the note.
- If the market views the speech as surprisingly hawkish, there could be "a decent sell-off in the front end of the U.S. yield curve."
- Investors are not pricing in much volatility for Jackson Hole, which could leave more room for a downside surprise if Powell doesn't signal anything that can be perceived as dovish.
Thought bubble: I'm glad we're finally getting this speech so investors can stop chasing reasons to justify this past week's selling. It may have been nothing more than jitters ahead of Powell's remarks as opposed to any loss of conviction in the Big Tech stocks or any other market narrative.
