Market Braces for Powell's Jackson Hole Speech Amid Renewed Confidence and Rate Cut Expectations
Monday, Aug 19, 2024 3:00 am ET
Renowned economist Tao Dong perceives a resurgence of market confidence as the global focus shifts to the annual central banking symposium in Jackson Hole, Wyoming, from August 22-24. Following better-than-expected economic indicators, the fear of recession is abating, leading to a surge in risk assets. Notably, the August inflation rate in the U.S. fell below 3%, and consumer confidence rebounded unexpectedly, fueling optimism about a soft landing for the economy. Consequently, global stock markets recorded their largest single-week gain in nine months, with the Nikkei 225 index in Japan surging 7.9%.
U.S. economic data last week reinforced the notion of a soft landing, which has long been advocated by Tao. The University of Michigan's August consumer sentiment index rose to 67.8 from 66.4 previously, surpassing economists' median forecast of 66.9. Although consumer sentiment remains inhibited by high living costs, a cooling labor market, and heavy borrowing costs, household demand appears resilient. Significant reliance on credit cards and savings to maintain spending highlights consumers' confidence in the labor market, despite only 35% expecting unemployment to surge significantly in the coming year. This trend aligns with the Federal Reserve's aim of slowing consumption without collapsing confidence.
July's inflation data further buttressed the optimism, with the Consumer Price Index (CPI) continuing its downward trend for the fifth consecutive month, dropping to a level not seen since the early pandemic. The core CPI, excluding volatile items like food and energy, rose 3.2% year-on-year, aligning with market expectations. Despite the personal consumption expenditures (PCE) price index not yet meeting the Federal Reserve's 12-month average target, the overall inflation trajectory gives the Federal Open Market Committee (FOMC) ample "confidence" to potentially begin a rate-cutting cycle in September.
Market pricing in the futures market suggests a 100% probability of a 25-basis-point rate cut in September, with a 34% chance of a 50-basis-point cut. By the end of March next year, the implied rate decrease totals 146 basis points, forecasting an average drop of 29 basis points across the next five FOMC meetings. This diminishes the likelihood of a drastic rate cut, a sentiment shifting away from earlier market panic.
Tao's recent views resonate with market trends. Indicators like the "Sahm Rule" point towards normalization rather than a hard landing. The sharp decline in nonfarm payroll numbers reflects a return to equilibrium, demanding careful monitoring but not overreaction. The U.S. economic growth, consumer confidence, employment, and inflation trends currently suggest normalization.
The August Bank of America global fund manager survey revealed 76% of fund managers foresee a U.S. economic soft landing within the next year, with only 13% predicting a hard landing. The proportion of fund managers holding cash has increased to 4.3%, a slight rise under market volatility but still exceedingly low compared to post-pandemic levels, indicating minimal "risk-off" strategies.
In Jackson Hole, the symposium will focus on reassessing the effectiveness and transmission of monetary policy. Given the Federal Reserve's recent signals and anticipated rate cuts, Powell's address may outline the future rate path. The Fed's current economic outlook includes inflation nearing policy goals, elevated recession risks warranting labor market monitoring, increased financial market volatility necessitating verbal guidance, not direct intervention, and isolated credit issues not posing systemic risks.
Tao anticipates a measured rate cut trajectory, moving towards a neutral policy rate that neither stimulates nor suppresses the economy, while attending to recession and inflation risks. Overreaction could incite market panic. He believes that normalizing economic growth, consumer confidence, and inflation does not equate to an immediate downturn but aligns with a managed end-stage economic cycle. Observing consumer confidence remains paramount, with labor market indicators as key forward-looking measures.
Chicago Fed President's recent remarks encapsulate the Fed's stance: "The Fed's decisions are economy-related, not influenced by elections," and "We do not respond to the stock market; our goal is maximizing employment and stabilizing prices." As Powell steps back into the spotlight this week, his commentary will be pivotal.
This week’s key events include Powell's address at Jackson Hole on the morning of the 23rd, Harris's acceptance speech at the Democratic National Convention on the 22nd, BoJ Governor Ueda's parliamentary testimony regarding recent rate hikes, the ECB’s release of its July policy meeting minutes, and the FOMC’s July meeting minutes.
U.S. economic data last week reinforced the notion of a soft landing, which has long been advocated by Tao. The University of Michigan's August consumer sentiment index rose to 67.8 from 66.4 previously, surpassing economists' median forecast of 66.9. Although consumer sentiment remains inhibited by high living costs, a cooling labor market, and heavy borrowing costs, household demand appears resilient. Significant reliance on credit cards and savings to maintain spending highlights consumers' confidence in the labor market, despite only 35% expecting unemployment to surge significantly in the coming year. This trend aligns with the Federal Reserve's aim of slowing consumption without collapsing confidence.
July's inflation data further buttressed the optimism, with the Consumer Price Index (CPI) continuing its downward trend for the fifth consecutive month, dropping to a level not seen since the early pandemic. The core CPI, excluding volatile items like food and energy, rose 3.2% year-on-year, aligning with market expectations. Despite the personal consumption expenditures (PCE) price index not yet meeting the Federal Reserve's 12-month average target, the overall inflation trajectory gives the Federal Open Market Committee (FOMC) ample "confidence" to potentially begin a rate-cutting cycle in September.
Market pricing in the futures market suggests a 100% probability of a 25-basis-point rate cut in September, with a 34% chance of a 50-basis-point cut. By the end of March next year, the implied rate decrease totals 146 basis points, forecasting an average drop of 29 basis points across the next five FOMC meetings. This diminishes the likelihood of a drastic rate cut, a sentiment shifting away from earlier market panic.
Tao's recent views resonate with market trends. Indicators like the "Sahm Rule" point towards normalization rather than a hard landing. The sharp decline in nonfarm payroll numbers reflects a return to equilibrium, demanding careful monitoring but not overreaction. The U.S. economic growth, consumer confidence, employment, and inflation trends currently suggest normalization.
The August Bank of America global fund manager survey revealed 76% of fund managers foresee a U.S. economic soft landing within the next year, with only 13% predicting a hard landing. The proportion of fund managers holding cash has increased to 4.3%, a slight rise under market volatility but still exceedingly low compared to post-pandemic levels, indicating minimal "risk-off" strategies.
In Jackson Hole, the symposium will focus on reassessing the effectiveness and transmission of monetary policy. Given the Federal Reserve's recent signals and anticipated rate cuts, Powell's address may outline the future rate path. The Fed's current economic outlook includes inflation nearing policy goals, elevated recession risks warranting labor market monitoring, increased financial market volatility necessitating verbal guidance, not direct intervention, and isolated credit issues not posing systemic risks.
Tao anticipates a measured rate cut trajectory, moving towards a neutral policy rate that neither stimulates nor suppresses the economy, while attending to recession and inflation risks. Overreaction could incite market panic. He believes that normalizing economic growth, consumer confidence, and inflation does not equate to an immediate downturn but aligns with a managed end-stage economic cycle. Observing consumer confidence remains paramount, with labor market indicators as key forward-looking measures.
Chicago Fed President's recent remarks encapsulate the Fed's stance: "The Fed's decisions are economy-related, not influenced by elections," and "We do not respond to the stock market; our goal is maximizing employment and stabilizing prices." As Powell steps back into the spotlight this week, his commentary will be pivotal.
This week’s key events include Powell's address at Jackson Hole on the morning of the 23rd, Harris's acceptance speech at the Democratic National Convention on the 22nd, BoJ Governor Ueda's parliamentary testimony regarding recent rate hikes, the ECB’s release of its July policy meeting minutes, and the FOMC’s July meeting minutes.