Jackson Hole Symposium – When doves try

Market pricing of the Federal Funds rate currently sits at 93 basis point of easing by year-end. Let us put that into perspective it was 110 basis points of easing at the peak of excitement, yet despite the increase in yields DXY has sold off and now trades sub-102.00 and is still falling like a stone. Why?

It’s not like EUR/USD data from Europe is smashing USD bulls, European PMIs are expected to be around 50.1, a barely expanding outlook. So it’s not that.

Second point some are highlighting is the rise and rise of Vice President Harris. The odds of her taking the Oval Office are mounting by the day. On the day it was announced she will be Democrats presumptive nominee her odds of winning according to Predictit.org was 45c now:

She is odds on. Which has put her policies front and centre, including her latest announcement of possible increase to the corporate tax rate to as high as 28 percent. That might explain DXY’s fall. But really it looks to be down to the only event that has mattered all year – when is the Fed going to cut rates?

The off again on again nature of where the Fed sits has been down to the surprise rally in inflation in the March quarter and this has led to Board dissent, mis-matching communication and a general rudderless trading in bonds, FX and like as Powell and Co. faffed about.

That appears like its going to end this week as we turn our attention to Wyoming and the annual Jackson Hole Monetary Policy Symposium. 

Everything is gearing up to a Jerome Powell speech that will finally set the ship on a clearer path.  

Why do we think this? Because history shows that Jackson Hole is normally when Fed Central Banks lay out their playbooks for the coming period.

For example:

In 2010 as the world and the US struggled to break out of the slump created by the Global Financial Crisis then-Fed Chair Ben Bernanke hinted (practically mapped out) the second series of Quantitative Easing, the bond-buying program designed to stimulate growth and maintain price stability. The markets responded fervently to the money taps being opened further, and the bulls that were long made a killing.

Then in 2020 Now-Fed Chair Jerome Powell announced a major shift in Fed policy framework, introducing average inflation targeting rather than the hard and fast figure of the previous generations. This meant the Fed would now be able to tolerate price fluctuations and periods of time where inflation might hold above the traditional 2% target before raising interest rates. This was in response to COVID and having the ability to flex policy due to the unforeseen nature COVID was creating.

In 2024 – will August 23 be another point for the history books? The doves certainly think so.

Expectations are he will map out what the board is willing to tolerate around inflation as recent economic data points are a mixed bag which include:

An easing Inflation rate, with July’s consumer price index falling below 3 per cent for the first time since 2021 but at 2.8 percent is still well off target and is falling at a slower pace than forecasted.
Consumer spending remains strong despite the first rate rise in the Federal Funds rate taking place over 20 months ago. July’s retail sales report showed a 1 per cent increase, well above expectations.
Then there is the labour market, which was the cause of the recent market volatility due to what is known as Sahm’s recession indicator. US non farm payrolls in the month of July came in at 4.4 percent – this is low by historical standards but it’s the speed of change that triggered the Sahms recession indicator. Since 1950 every time the three-month moving average of the unemployment rate has risen by more than 0.5 percent from the previous 12 month low, The US has entered a recession.

That’s what is so telling for the market and why the doves are really trying to push The US dollar lower. Powell is clearly facing a race against time in catching the economy and the unemployment rate before the handbrake in higher interest rates, which has been doing its job, stops working and causes the US to skid and crash.

With all this as his “data dependent” input, Powell’s remarks will be closely watched for further confirmation of an anticipated interest rate cut that is expected in September. As mentioned above the market has 93 basis points come year end. With only three more meetings before the end of the year – one of the meetings could have a double notch cut associated with it. Will it be September?

That is where Jackson hole comes in for the following reasons:

A 25-basis-point cut may not be sufficient to prevent the economy from slipping into a recession, as higher rates make it more challenging for businesses to borrow and grow.
A 50-basis-point cut, on the other hand, risks reigniting inflation and sparking another speculative bull run in the markets, as cheaper borrowing costs could lead to increased risk-taking.

Jackson Hole gives Powell the ability to test out the market’s appetite and concern, on this last point. If the response to a 50-basis point cut leads to speculative trading, and inflation fears before the September meeting then it will likely take the softer path. If however the markets suggest this isn’t enough to ‘stop the skid’ then come December the 93 plus basis point cuts forecasted are on.

Which brings us to the final point. Is the USD oversold? In short – no. Yes, bearish beats are growing but looking at the likes of the EUR/USD, AUD/USD, GBP/USD and USD/CAD none of these are screaming oversold. In fact there is clear room for further runs particularly in the first two.

So set your alarm clocks – Jackson Hole is going to provide the playbook for the rest of the FX year.

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