Market Comment – Jackson Hole suspense keeps traders defensive

Aug 21, 2023 at 9:13 am GMT- Marios Hadjikyriacos

• Markets in a stalemate, waiting for Jackson Hole clarity 

• All eyes on bond yields - will Powell disturb the waters? 

• Dollar and gold stable, China rate cut fails to impress 

Quiet before the Fed storm? 

A fragile sense of calm has returned to global markets. From currencies to equities to commodities, most assets started the new trading week in relatively narrow ranges. Investors seem reluctant to adjust their portfolios ahead of what promises to be a stormy week, featuring the Fed’s annual economic symposium at Jackson Hole, Wyoming. 

This is mostly an academic event where policymakers gather to exchange views on monetary policy and economic trends, but because it has been used by Fed leaders over the years to signal major strategy shifts, investors view it almost as an unofficial FOMC meeting. 

Hence, the spotlight will fall on Chairman Powell’s flagship address on Friday. With 10-year US yields trading near their highest levels of this cycle in anticipation, his remarks about the path of interest rates will either be the catalyst for a breakout or a rejection, with tremendous repercussions for every asset class. 

How could the event play out? 

Since Powell last spoke at the Fed’s July meeting three weeks ago, there has been a streak of stronger-than-expected US economic releases. The Atlanta Fed GDPNow tracker currently estimates growth for this quarter at an annualized 5.8%, mostly thanks to a resilient consumer. 

Coupled with a robust labor market, rising energy prices, and the revival of the housing sector, there are mounting concerns that inflation might not return to its 2% target anytime soon. Therefore, while there has been serious progress on the inflation front since last year, it is still too early for the Fed chief to take a victory lap and declare ‘mission accomplished’. 

He will most likely maintain a data-dependent approach and keep his options open, although considering the strength in the data flow lately, the risk is that he strikes a more hawkish tone than he did at his last appearance. Specifically, by putting more emphasis on the prospect of keeping interest rates elevated for a longer period of time. 

China cuts rates, yields rise but only JPY cares

Familiar themes are moving the markets on Monday, with worries around China’s economic health and rising US yields still in the driver’s seat. Beijing delivered a smaller-than-expected cut in lending rates today, which was met with disappointment, dragging local stock markets and China-sensitive currencies like the Australian dollar down. 

It’s becoming painfully clear that there are no magical solutions to dig China out of its economic hole. Monetary and fiscal authorities are conscious of the nation’s already-massive debt load and are therefore wary of over-stimulating. And with foreign yields marching higher, there’s even more downside pressure on the yuan, forcing heavier FX interventions. One escape valve would be a 2015-style yuan devaluation, which could help stabilize the economy but rattle the markets.   

Finally, it is striking that although US yields have resumed their ascent, with both nominal and real 30-year yields briefly hitting new cycle highs today, there hasn’t been any collateral damage on other asset classes. Neither the dollar, nor gold prices, nor stock markets seem to care much - at least not yet. 

Only the Japanese yen is paying attention to the bond market, with the battered currency losing some more ground today. That said, another round of FX intervention by Tokyo seems to be some distance away, as the speed of the yen’s depreciation has been much slower this time compared to last year’s meltdown.