Financial markets are bracing for what could be a ‘very hawkish’ Jackson Hole speech by the Fed’s Powell

Financial markets are bracing for what could be a ‘very hawkish’ Jackson Hole speech by the Fed’s Powell

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

That’s the general conclusion of analysts, economists and investors in the run-up to Powell’s comments, the day after Neel Kashkari, a former dove-turned-hawk at the Minneapolis Fed, said the central bank needs to move forward with tightening the economy. monetary policy until inflation clearly moves down.

While US DJIA stocks,
+0.24%

SPX,
+0.38%

COMP,
+0.60%
buzzing higher on Wednesday afternoon, they struggled on momentum after Tuesday’s remarks by Kashkari. Stocks retreated from their summer rally last week as Fed officials reiterated their commitment to cut inflation to 2%, even as signs the economy is slowing and despite a negative surprise in the U.S. consumer price index. in July.

Treasury yields also rose in anticipation of aggressive Fed action next month, and Fed fund futures traders have re-pricing with a more than 50% probability of a 75 basis point increase in September. That move would be the Fed’s third consecutive rate hike of this size, and the fifth overall increase since the central bank’s rate hike campaign began in March.

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

Hopes that the Fed could ease its aggressive rate hikes resurfaced on Tuesday after a disappointing round of US data that included a drop in new home sales for July. But those hopes are starting to fade, though well-known analysts like Goldman Sachs economist Jan Hatzius still see a chance that Powell will present a case to slow the pace of rate hikes. Phil Camporeale of JPMorgan Chase & Co. also questioned why Powell would need to be overly aggressive this week.

Here is the summary of the views:

‘Falcon’s Shock’

“The case that a hawkish clash is to come is that the president more often has to speak publicly on behalf of the [policy-setting Federal Open Market] Committee, and this is your opportunity to skew your remarks to your own personal bias,” Wessel, Reid and Allen of Deutsche Bank wrote in a note Wednesday. Powell “may personally weigh the balance of risks against the worst inflation outcomes, but we’ll see if his slope is strong enough to satiate the market’s appetite.”

Preparing and Hedging

The Minneapolis Fed’s Kashkari “is upping the ante on the hawkishness of inflation,” a sign that the Fed’s communications are “meant to prevent easier financial conditions from prematurely undoing the Fed’s work,” said Ben Emons, managing director. of global macro strategy from Medley Global Advisors. In New York.

“The 100-day moving average of the S&P 500 is at 4090, the next potential support zone,” Emons wrote in a note. “The 4090 strike call and put options expiring on 8/31 are now priced at nearly equal volatility. It is a reflection of a market bracing itself with options for an uber hawkish speech while protecting itself with orders for a dovish slant.”

‘Danger’ with half-point walk

“Powell’s performance will convince the public that the Fed takes inflation seriously in the context of the 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 reduction to 25 basis points from November, Tang wrote in a note. The “danger” with a 50 basis point rise in September “is that it cuts the right tail of the 2022 results too early, when the FOMC is trying to convince the market of a higher terminal rate and a subsequent easing cycle. ”

Walking 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 bullish cycle is not coming to an end,” said BMO Capital Markets strategists Ian Lyngen and Ben Jeffery.

“In keeping with this theme, Kashkari’s comment that it is ‘very clear’ that the Fed needs to tighten monetary policy certainly resonates and we hope this is just the beginning of a series of official headlines – most of which will take place in the week. trading. comes to an end,” they wrote in a note.

Not so fast

“I think he will make a case, as he did at his last press conference, to slow the pace of the increases,” said Hatzius of Goldman Sachs.

“We had two moves of 75 basis points. Our expectation would be, barring significant data surprises, the September move to be 50,” Hatzius told Bloomberg Television’s Surveillance Tuesday. “I don’t think he’s specific about the number, but I think he’ll say there’s a risk of over-tightening and so it makes sense to go a little slower than disproportionate increases.”

Sticking with the hawkish rhetoric

“Markets are selling in anticipation of President Powell’s opening speech at the Jackson Hole conference on Friday. The thinking is that it will strongly reiterate the Fed’s commitment to reducing inflation and perhaps indicate that disproportionate rate hikes will continue at upcoming meetings,” said Tom Graff, chief investment officer at Baltimore-based Facet Wealth. “This view has been the main driver of the sale of shares as well as the jump in interest rates in recent days.”

“It is incredibly important that the Fed restores [its] reputation for price stability,” Graff wrote in an email. “So, as a result, he’s going to deliver the same message he did at the July FOMC, even though they’re starting to consider the possibility of a break early next year. They’re going to stick with this aggressive rhetoric until they’re 100% sure it’s time for a break.”

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