Powell’s Jackson Hole Moment Could Reinvigorate The Doves
MarketPulse | Aug 22, 2019 01:31AM ET
The main event of the week is Fed Chair Powell’s speech at the annual Jackson Hole symposium on Friday. The Fed must be concerned with how low bond markets have taken Treasury yields, the 10-Year yield on Treasuries is almost a half percentage point below the Federal Funds Target range. Everyone wants to see if Powell begins to address his policy miscommunication at last month’s post-rate decision press conference where he said the rate reduction was merely a “mid-cycle adjustment.” Market participants are expecting the Fed to signal they are ready to ease again, but possibly remaining stubborn in avoiding any commitment to an easing cycle.
The other key event left this week is eurozone PMI readings, which are broadly expected to come in softer and provide more support for the ECB to continue their accommodative stance and possibly announce additional measures to support the flailing economy.
Will Softer EZ PMIs take the euro below 1.10?
Volatility should increase for EUR/USD as we should eventually see a battle of doves over the coming months. The ECB is already in an easing cycle and we could see limited downward pressure on the euro with the announcement of additional cuts and additional measures to support the economy. The US-China trade war has weighed on the eurozone economy and we could see the US-European trade war remain a constant headache for any optimism of a rebound. The Fed has been stubborn in committing to an easing cycle, but global developments are likely to warrant further cuts and we could very well see a return of QE.
Minutes
The Minutes to last month’s Fed rate cut showed that a number of officials stressed the need for Fed flexibility, which should support the argument for the Fed to deliver another rate cut in September. With most officials viewing the July cut as a mid-cycle adjustment, it will take further deterioration with the global outlook for them to commit to an easing cycle. Inflation has seen recent upticks, but the overall longer-term trend has been downward and the risks of becoming Japan should keep the Fed committed to delivering further rate cuts.
The Fed will keep optionality on the table and we should see Fed Chair Powell’s keynote speech at Jackson Hole on Friday solidify a September rate cut and deliver weak commitment for more to come.
Get The News You Want
The bullish case for stocks remains intact and we could see many focusing on the fact that a couple of FOMC participants supported half-point cut. The Minutes were a non-event and we should sideways price action until Powell’s Jackson Hole keynote speech on Friday. The Fed could very well correct their communication mistake at Jackson Hole, which would be welcomed holders of risky assets. The markets are still pricing in four rate cuts over the next 12 months.
Earnings
Better-than-expected results from Lowe’s Companies Inc (NYSE:LOW) and Targets drove today’s rally. Lowes rallied the most in 10 years after a surprise earnings beat provided optimism the company is headed in the right direction. Target (NYSE:TGT) hit record highs after delivering strong results and raising their full-year outlook. S&P 500 futures are still just a few percentage points from record territory.
Gold
Gold’s bullish trend remains intact, but investors appear set on waiting for clarity from the Fed on how accommodative they will be for the rest of the year. It’s all about Jackson Hole and we could see the yellow metal consolidate until we hear from Fed Chair Powell on Friday.
Oil
Oil prices fell after the EIA report came in mixed. The crude decline was countered by builds in distillates and gasoline. Today’s decline took WTI below both the 200-and 50-day SMAs. With driving season winding down, we could see softer demand in the coming weeks.
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