Today has the potential to bring a showdown between two long-standing market memes; “Don’t fight the tape”, and “Don’t fight The Fed”. Historically these have been complementary or even interchangeable. For the last month, however, they have been in opposition with dovish stock investors driving equities higher on speculation the Fed could pause interest rate hikes soon and then cut rates next year to support a slowing economy versus hawkish Fed officials who have been talking about the need to continue tightening monetary policy and keeping interest rates higher for longer than the current investor consensus in order to get inflation back under control. Yesterday, for example, in the face of hawkish comments from four Regional Fed Presidents, US indices finished the day with gains of 1.0% to 1.6%.
This morning at 10:00 am EDT, Fed Chair Powell gives the keynote address at the Fed’s annual Jackson Hole Symposium. This is a high-profile forum attended by central bankers and economists from around the world that Fed leaders have historically used to send signals about the direction of US monetary policy. At the last FOMC meeting, Powell tried to offset a big rate hike with a neutral tone at the press conference, which was interpreted by investors as dovish so the question is whether Powell will stay neutral or adopt the more hawkish tone of his Fed colleagues and leaders of some of the other major central banks, several of whom are expected to be attending the conference in person.
Some parts of the speech that investors may particularly focus on are any hints related to how high interest rates could go, how long they could stay elevated, the Fed’s plans for Quantitative Tightening (which is scheduled to accelerate starting in September), whether the Fed is willing to cause a recession to get inflation under control, what it would take to convince the Fed to stop raising rates, and any outlook related to inflation or the economy.
Speaking of inflation, Fed’s preferred measure, the Core PCE price index, came in below expectations for August this morning (4.6% vs street 4.7% and previous 4.8%), and suggested that inflation may be peaking. Personal income (0.2% vs street 0.6%) and Personal Spending (0.1% vs street 0.4% and previous 1.1%) were both weaker than expected.
Ahead of today’s big speech, US index futures have slipped back 0.1%-0.3%, while in Europe, the Dax and the FTSE are both flat. In bond trading, shorter treasury yields (1-5 years) are up slightly while longer yields (10 and 30 years) are down slightly. The US Dollar is steady, but cryptocurrencies are down with Bitcoin falling 0.5% and Ethereum losing 2.8%, indicating some caution creeping in. Commodities, meanwhile, are rallying with WTI crude oil up 1.3%, natural gas up 1.7% and copper up 1.9%.