Jackson Hole: Don’t expect a dovish Powell - CIBC

According to Avery Shenfeld, an analyst at CIBC, the impact from Powell’s speech at Jackson Hole is likely to be limited and if there is a tilt on it, it should be slightly more hawkish than dovish.

Key Quotes:

“This will be Jay Powell’s first turn at this podium, and we lean towards a molehill rather than a mountain mover in terms of the likely market reaction. If there’s a tilt, it should be slightly more hawkish than dovish, for three reasons.”

“First, looking at the fed funds futures, which plateau at a rate under 2.75%, and 10-year rates still below 3%, it’s hard to see the Fed as being worried that markets are heavily overstating the rate hikes ahead. So there’s no real need to talk down rate expectations at this point.”

“Second, the challenges to Fed thinking these days are mostly coming from a camp that thinks the Fed is hiking too much, too soon.”

“Third, there’s the elephant in the room who nobody will mention by name, President Trump. If Powell wants to assert Fed independence, this would be the worst time to suddenly come across as more dovish, lest it appear that he is succumbing to Trump’s latest reminder that he is “not thrilled” about rate hikes.”

“A hawkish tilt has room to nudge shorter term Treasury yields a bit higher, and would be a modest and short-term plus for the US dollar. Beyond any one-day reaction coming out of Jackson Hole, there’s much more room for overseas central banks to surprise markets with a slightly earlier timing for starting to raise rates or unwind QE, so the medium terms leaves more room for US dollar weakness against the euro (in the next two quarters) or the yen (in the latter half of 2019).”