Powell’s Jackson Hole Moment could Reinvigorate the Doves

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?

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.

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 Lowes 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 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.

Content is for general information purposes only. It is not investment advice or a solution to buy or sell securities. Opinions are the authors; not necessarily that of OANDA Business Information & Services, Inc. or any of its affiliates, subsidiaries, officers or directors. If you would like to reproduce or redistribute any of the content found on MarketPulse, an award winning forex, commodities and global indices analysis and news site service produced by OANDA Business Information & Services, Inc., please access the RSS feed or contact us at info@marketpulse.com. Visit https://www.marketpulse.com/ to find out more about the beat of the global markets. © 2023 OANDA Business Information & Services Inc.