US equity futures extended losses as the week of the Jackson Hole Symposium began, and the 10-year Treasury yields and the Dollar Index are running near four-week highs. This sends one message: The market does not anticipate a friendly Powell this week.
Federal Reserve officials spent much of last week pushing back against market dovishness, but traders will have to wait until next week at Jackson Hole for something to get their teeth into. The FOMC minutes on Wednesday acknowledged the risk of tightening but emphasised that inflation was unacceptably high and that policymakers were not convinced oil and gas prices would stay down. Unlike the previous meeting, the decision to hike by 75bps was unanimous.
Hawkish Fed speaks, and rising yields helped push the S&P 500 down last week, something that has not happened since the middle of July. Meanwhile, yield curves bear steepened, led by a selloff in the short-end.
With inflation still a major concern for investors, Jackson Hole could be an opportunity for the Fed chair to reset market expectations. Indeed, Richmond Fed’s Thomas Barkin said the central bank was resolved to curb red-hot inflation, even if that meant risking a US economic recession.
Having said that, a deteriorating housing market will not dissuade the Federal Reserve from raising interest rates substantially higher. Better-than-expected retail data suggest the US economy has enough momentum to withstand more tightening. The minutes of the July FOMC meeting confirmed the central bank’s resolve to crush inflation.
Fed Chair Jerome Powell’s speech at Jackson Hole on Friday is likely to reaffirm the US central bank’s commitment to further tightening even as signs emerge that inflation may be moderating. According to the latest data from the Commodity Futures Trading Commission, an aggregate gauge of net-short non-commercial positions across all Treasury maturities shows that bearish bets have grown the most since 2018, according to the latest data from the Commodity Futures Trading Commission.
This is a chance for Powell to reset expectations in financial markets when central bankers gather this week at their annual Jackson Hole retreat. We do not expect much of the dovish message he will convey this time.
Fullerton Markets Research Team
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