Why Powell is Likely to Take a Hawkish Stance at Jackson Hole
Jerome Powell is going to have to correct market expectations from the last Fed meeting in July. In July’s meeting, the Fed recognised that some ‘recent indicators of spending and production have softened’. This was enough for some to say, ‘The Fed has taken a dovish shift’. There was then a run in equities, a drop in the USD, and a drop in yields as markets looked for a ‘dovish pivot’. Jerome Powell is likely to correct this perception with a more hawkish stance next week.
The mixed data since the last Fed meeting
There has been a very strong jobs print way above market expectations, a big miss in the NY Empire Manufacturing print, a beat in Manufacturing and services ISM, core inflation dropped more than expected at 5.9% y/y vs 6.1% forecast, consumer expectation in the Univ of Michigan survey beat expectations, but house sales are falling more sharply than minimum expectations.
All the mixed recent US data has meant the picture is really unclear for the US economy. So, there has not been a conviction in any run higher in risk assets since the picture is so mixed. This has been a very tricky market to trade; check this recent article outlining what approach to take in this kind of market.
Lessons from history
Jerome Powell will want to avoid the mistake of going ‘soft’ on inflation. This softly, softly approach led to Volcker in the 1980s having to come in and take interest rates up to 20% and unemployment to 10%. This is common knowledge and in living memory, so Jerome Powell is likely to tell markets we are hiking until the job is done. It is reasonable to expect a hawkish stance from Powell this week.
Therefore, be very cautious of being long on equities into the meeting as Powell could easily send the recent rally in stocks sharply lower by reminding markets that he is going to be hiking rates until inflation falls back down.
HYCM clients can access the Seasonax product in order to analyse over 25,000 currency pairs, indices, commodities, as well as individual stocks. Please contact your account manager for a free trial. Certain products & services mentioned herein may or may not be available to all clients depending on which HYCM Capital Markets Group entity their trading account(s) adheres to.
About: HYCM is the global brand name of HYCM Capital Markets (UK) Limited, HYCM (Europe) Ltd, HYCM Capital Markets (DIFC) Ltd and HYCM Limited, all individual entities under HYCM Capital Markets Group, a global corporation operating in Asia, Europe, and the Middle East.
High-Risk Investment Warning: Contracts for Difference (‘CFDs’) are complex financial products that are traded on margin. Trading CFDs carries a high degree of risk. It is possible to lose all your capital. These products may not be suitable for everyone and you should ensure that you understand the risks involved. Seek independent expert advice if necessary and speculate only with funds that you can afford to lose. Please think carefully whether such trading suits you, taking into consideration all the relevant circumstances as well as your personal resources. We do not recommend clients posting their entire account balance to meet margin requirements. Clients can minimise their level of exposure by requesting a change in leverage limit. For more information please refer to HYCM’s Risk Disclosure.