Powell’s Feint

Powell’s Feint

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

With just four hours to go until Jerome Powell’s podium appearance at Jackson Hole, all the ‘ifs’ and ‘buts’ have been debated and the last-minute jerky market positioning done and dusted.

The only concern left is that it could be a wet miscarriage.

The head of the Federal Reserve gives his long-awaited speech at 1000 EDT. (1400 GMT)

But the flurry of comments and interviews from his Fed colleagues over the past 24 hours leaves markets with little news about the trajectory of monetary policy.

Interest rate futures come into play with a much more hawkish bias compared to early August, putting the Fed’s peak “terminal” rate early next year at around 3.8%. However, this is still below the 4% peak they expected in mid-June and there is still at least one rate cut slated for the end of 2023.

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

That said, futures are again skewed to a 60% chance of another 75 basis point rally at the September meeting.

One possible focus is that Powell avoids detailed guidance on ‘peak rates’ but emphasizes that they are unlikely to be cut next year. Any finer points in the Fed’s balance sheet summary will also be taken advantage of, with some analysts now fearful that assumptions about the pace of so-called ‘quantitative tightening’ could drain commercial banks’ reserves too fast for any sharp slowdown in the coming year.

While bond markets have fluctuated and the dollar retreated in anticipation of this week’s rant, Wall St stocks looked less troubled – staging their best one-day rally in two weeks on Thursday and with stock futures holding those earnings today.

While Bank of America’s weekly investment flows show further outflow from most asset classes and overall positioning still at ‘high low’, financial stocks stood out this week with their biggest inflow since January.

Powell aside, world markets were focused on Friday on the deepening European energy crisis and China’s latest stimulus plans for infrastructure spending. Copper prices hit their highest level in two weeks in the latter.

But it’s set to be a cold winter. Describing it as a bona fide ‘crisis’, UK regulators have announced that household energy bills will rise by 80% a year from October. Rising energy bills also pushed Germany’s consumer confidence reading to a record low for the third consecutive month.

Brent oil prices, so crucial to inflation and the central bank’s narrative this year, have kept this week’s gains back to $100 a barrel – largely on fears that OPEC will cut output if a nuclear deal hits. get Iranian oil back to world markets.

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

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

Key developments that should provide more direction to US markets on Friday:

* US July personal consumption, Core PCE price index

* Balance of trade of goods anticipated in US July

* US August final consumer sentiment index reading in Michigan

* Fed chief Jerome Powell speaks at Jackson Hole 1400 GMT

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

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