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Lack of forward guidance from Jackson Hole leaves markets relatively unmoved

The dollar is trading below levels that prevailed ahead of Federal Reserve Chair Jerome Powell’s Friday appearance at Jackson Hole. Although markets (briefly) appeared to think otherwise, we read the speech as coming in slightly more dovish than expectations, with repeated use of the phrase “proceed carefully” helping put the central bank on a data-dependent footing into the autumn months.

Most major equity indices are up and Treasury yields are slightly lower on an essentially-unchanged monetary policy outlook for the US and the euro area. Commodity-linked currencies are recovering from a short-lived rally that unfolded when China launched half-hearted attempts at bolstering equity market confidence last night.

A slew of macroeconomic data releases scheduled for later in the week are likely to help calibrate monetary policy expectations for the euro area, China, and the United States. Volatility levels in currency markets remain surprisingly low – well below historical seasonal averages (with the global financial crisis extracted) – arguably suggesting that some complacency has set in among traders.

1-month realized volatility by trading week

North America

In Friday’s widely-anticipated comments, Mr. Powell implicitly suggested that rates could rise again in 2023 if the economy fails to slow, saying that continued above-trend growth “could put further progress on inflation at risk and warrant further tightening of monetary policy”. But he also highlighted tighter financial conditions, slowing residential investment and industrial activity, and an easing in labour market slack as signs that higher rates are beginning to take their toll, and said the Fed would “assess our progress based on the totality of the data and the evolving outlook and risks” at upcoming meetings. To us, this language suggests that Powell is unconvinced of the economy’s recent surge, and that the bar to additional rate increases has been lifted relative to levels that prevailed when the central bank’s last “dot plot” summary of economic projections was released in June.

There are no major North American data releases in the docket for today, with the Dallas Fed’s manufacturing survey for August – out at 10:30 – unlikely to shift market pessimism on the tangible-goods demand cycle.

Thursday’s personal consumption expenditures report is widely expected to bear the imprint of a surge in outlays on Taylor Swift and “Barbenheimer” tickets, even as household balance sheets worsened. Personal income growth is seen slowing to 0.3 percent month-over-month, with a 0.8 percent rise in spending supported by a drawdown on savings and a rise in borrowing – a dynamic that suggests a deceleration could be in the offing. Fans might be singing “Look What You Made Me Do” with extra fervour in September.

Personal disposable income less personal consumption expenditures, billions USD

Friday’s non-farm payrolls report is expected to show headline jobs growth slowing, but not by enough to justify a shift in the Fed’s “higher-for-longer” stance. Consensus estimates suggest that 170,000 jobs were added in August, slowing from 187,000 in the prior month. Average hourly earnings are seen climbing 0.3 percent on a month-over-month basis, and the unemployment rate is seen holding at 3.5 percent.

Canada’s dollar is still pinned to the mat, failing to gain traction as oil prices soften and growth expectations slump. On Friday, Statistics Canada is expected to say the economy performed below the Bank of Canada’s forecast in the second quarter, with momentum continuing to fade in the preliminary July estimate on weaker consumer spending, slowing real estate activity, and an ongoing contraction in business investment. The data are likely to reinforce current market pricing, which suggests that the central bank is unlikely to deliver another hike at its September meeting.


Euro area inflation pressures likely remained uncomfortably high in August, but with statistical adjustments and base effects playing a significant role, the policy implications will remain unclear.
Data out on Thursday is expected to show year-over-year headline price gains holding above 5.1 percent in August, supported by last year’s sequential drop in energy costs – and this summer’s rise in global oil benchmarks – even as gas and electricity costs inch lower. Core inflation is seen slipping to 5.3 percent from 5.5 percent in the prior month, remaining stubbornly elevated as services costs climb and statistical distortions – introduced through changes in the harmonized price basket and a jump in German transit ticket prices – obscure underlying dynamics.

In Friday’s speech at Jackson Hole, European Central Bank President Christine Lagarde provided a masterful overview of global economic conditions (the speech, worth reading, is here) and avoided providing any direct guidance ahead of the September policy meeting. Over the last few weeks, many of the most influential members of the Governing Council have expressed growing concern about economic downside risks – but they may find themselves forced to hold their noses and hike rates again in the absence of evidence of a sustained decline in price pressures.

We note that the European Union trade balance has moved back into surplus territory as energy prices have declined – a shift that should, along with a reduction in Ukraine-related tail risks – help lift the exchange rate’s floor relative to levels seen last year.

European Union trade balance by product group, billions EUR, seasonally adjusted

With British markets shut for the summer bank holiday, the pound has been left to trade on Bank of England Deputy Governor Broadbent’s remarks at the Jackson Hole meeting over the weekend. Without providing explicit guidance on near-term monetary policy direction, the Deputy Governor said a fading in exogenous inflation triggers – the war in Ukraine and global energy costs in particular – should reduce upward momentum in domestic prices and wages in the months ahead, “but it’s unlikely these ’second-round’ effects will unwind as rapidly as they emerged. As such, monetary policy may well have to remain in restrictive territory for some time yet”. Sterling is up modestly against the dollar, but remains tightly rangebound near the 1.2500 handle.

Asia Pacific

The latest set of purchasing manager indices out of China’s beleaguered economy could add to the sense of gloom that has descended on global commodity markets. The services sector – sensitive to housing markets and consumer sentiment – likely edged closer to outright contraction in July. The manufacturing sector probably fared worse, with activity levels moving even deeper into negative territory as global demand slumped and domestic consumption remained weak.

More broadly, we think fears of a “Lehman moment” in China are overblown. As we have long argued, the country’s financially repressive and investment-led economic model has been running on fumes for more almost 15 years, and powerful political constituencies are preventing a pivot toward a more sustainable future. But the government’s control of the financial system gives it the capacity to avoid the “mark to market” losses that typically trigger systemic seize-ups in more open economies, helping avoid the decisive moment of reckoning that Western and emerging market countries face so often. China’s imbalances could take decades to correct, and are more likely to lead to long-term underperformance than a sudden collapse.

A bad-news-is-good-news dynamic could begin to play out. With this week’s sharply-negative prints (likely) priced in, and stimulus efforts beginning to accelerate – over the weekend, authorities cut the stamp duty on share transactions, lowered margin ratios, and put limits on major shareholder divestment – we think the potential exists for a modest rebound in overall sentiment levels.

In comments at the Jackson Hole conference, Bank of Japan Governor Ueda hinted policy adjustments were unlikely, refusing to provide relief to government bond markets – or the yen. “We think underlying inflation is still a bit below our target of 2 percent,” he said, “This is why we are sticking with our current monetary easing framework”. The exchange rate is gradually moving toward levels that could force the Ministry of Finance to intervene.

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