It's quite understandable why the markets are so fixated on this week's Jackson Hole when you look back across the money flows of late and you'll see just how fickle markets are this month.
July was a positive one, in terms of risk sentiment, but this month has been a typical seasonal trade with low volumes and higher volatility within a gradual decline, perhaps a tell-tale sign that something is not right. It was just very recent when Stanley Fischer, the Fed’s vice-chair, explained that he did not understand why equity prices had continued to surge and that this had made him uncomfortable.
The VIX soaring by 62% at the start of the month certainly wasn't how the bulls hoped August would start, but it might just be a signal for how the bull market could end and this is what's so compelling about this week's Jackson Hole taking place through the 24th-26th.
The topic at the Jackson Hole is 'Fostering a Dynamic World Economy,' and as analysts at Brown Brothers Harriman explained, however, that it does not lend itself to a talk of the nuances of monetary policy.
"Besides, what could Yellen say that could truly impact expectations for the trajectory of monetary policy that she did not say to Congress in last month's testimony? And if there were any questions, NY Fed President Dudley's recent comments would seem to answer them," argued the analysts at Brown Brothers Harriman. However, markets are trying to second guess what Yellen or Draghi might just surprise us with, after all, there is a great deal of uncertainty in many aspects of the world today and financial markets are severely lacking clarity and direction.
In fact, despite the Fed's hawkish rhetoric over the recent years, financial conditions are looser today than they were before the Fed first lifted rates at the end of 2015, specifically when you account for how equities have surged and bond yields decayed. As many would argue, the US economy is at full employment and unemployment has fallen to little over 4 per cent from crisis-era highs of 10 per cent. However, growth is still very tepid even while wages are rising faster than inflation, according to the most recent monthly job data reports.
You can hear the bulls cheering Yellen on from miles away, yet these achievements and stock market records may not be sustained for long. While many will not talk about it on the surface of this bull market, there is an underbelly that is certainly very concerning and the markets 'fear gauge', the CBOE Volatility Index (VIX), has been on a record-setting mission of its own.
However, the likelihood is that Yellen will strike a broadly sanguine note on Friday morning when she is scheduled to be speaking on financial stability at 8 a.m. local time (14:00 GMT) on Aug 25th; Afterall, that is her job, isn't it? (Draghi will take the podium at 1 p.m and we will come to him and what to expect further down).
She has to keep the markets faith-flame burning and she can't do that if she starts to warn of recessions pending, that rate hikes are almost over and that QE4 will be on its way to an economy near to you soon. And more to the point, rather than admit this week that the balance sheet will never be unwound, that in fact its going to go to $10 trillion from $4.5 trillion and that the Fed will follow suit of its counterparts at the BoJ and ECB, (for the first time in history, both the ECB and BoJ balance sheets have grown larger than the Fed's), we will likely hear, instead, a repeat of what was promised to us from the most recent FOMC minutes - "September is likely to be a month that the Fed will begin to unwind" - (Note, however, that it was years of talk from the data dependent Fed before they finally started to raise interest rates).
Anyway, I think the analysts at Brown Brothers Harriman are right. Unlike former Fed Chairman Ben Bernanke, Yellen has preferred not to use the Jackson Hole venue as a rostrum for forwarding guidance on monetary policy. However, given that she is talking about financial stability, she is going to reinforce New York Fed President Dudley's guidance of earlier this week that a rate hike for later in the year stays on the table, perhaps a booster early on the day for the greenback that is already overdue a sharp correction, purely as markets prefer it that way.
The other main potential market-moving event at the Jackson Hole will be a speech on Friday from Mario Draghi at 1 p.m. local time. Draghi, the European Central Bank president, is hoped by markets to drop some hints as to how the ECB proposes to taper its pace of purchases from the current level of €60bn a month in 2018. He might do this once he tells of his growing confidence in the local EZ economy. However, he will need to be careful not to cheer too loudly considering the recent strength of the euro.
It might be just as well that Yellen takes the stage first of all to spark some bullish life back into the US dollar, for whatever outcome is delivered at this Jackson Hole, it is likely to be the one event ahead of 2017 Q4's developments that steer the market's direction.
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