Across the financial markets, traders are battening down the hatches in preparation for a stormy reaction to Federal Reserve Chair Jerome Powell’s speech in Jackson Hole later this morning. Ten-year Treasury yields are up, equity indices are returning some of yesterday’s gains. The dollar is trading on a slightly weaker footing – up against the pound and the Mexican peso, down against the euro, yen, yuan, and loonie.

Traders think Powell will reiterate a data-dependent policy stance, leaving expectations for the September meeting essentially unmoved. Although the Fed chair’s thoughts on current economic conditions will be carefully analyzed, there will be more water under the bridge—in the form of payrolls and inflation data—before the rate-setting committee meets and generates the next set of “dot plot” forecasts.

But he is likely to deliver a higher-for-longer message, attempting to convince markets of the central bank’s commitment to bringing down demand in an overheated economy. Rates have ramped sharply in the last month, but investors are still assuming the central bank will follow its decades-old pattern of hiking into a slowdown and then reversing direction. By some measures, financial conditions are easier than in March, when the Fed began tightening policy. Mr. Powell will try to correct this.

The euro is stuck near parity, struggling to escape the psychological level’s gravitational pull. Minutes from the last European Central Bank meeting failed to deliver any new insights, a German sentiment index worsened for a third consecutive month in August, and energy prices continued their march upward in the last day, leaving traders broadly bearish on the currency.

More volatility could come after tomorrow’s panel discussion at Jackson Hole. Comments on post-pandemic policy from the European Central Bank’s Isabel Schnabel will be scrutinized for elements of hawkishness – and the common currency could break lower if they are found lacking.

Japanese inflation jumped more than expected in August, with the Tokyo consumer price index climbing 2.9 percent year-over-year – the highest in more than three decades. The core measure—which in Japan includes energy but excludes fresh food—rose 2.6 percent. With imported prices driving the bulk of the increase, the Bank of Japan is still considered unlikely to revise its loose-money policies in September, and depressed yield differentials are keeping the yen on the defensive.

Personal spending growth probably remained positive in July as American households drew on savings and summer travel rebounded. Data out at 8:30 is expected to show consumer outlays rose 0.5 percent in July, decelerating from 1.1 percent a month earlier as lower gasoline receipts worked against a surge in spending on services. Incomes are seen climbing 0.6 percent.

Inflation pressures likely subsided. The personal consumption expenditures price index rose 6.8 percent in June from a year earlier—the fastest since 1982–and is expected to downshift as improving supply chains and tumbling oil benchmarks weigh on goods costs. But the Fed’s preferred inflation indicator—the core index—may hold stable on a year-over-year basis, with price pressures broadening into intangible categories.

But consumer sentiment may have weakened slightly. The University of Michigan’s consumer sentiment index for August is expected to tick down to 55.2 from a preliminary reading of 55.5, and the inflation expectations subindices could inch upward. But with the data set for release in conjunction with Mr. Powell’s speech, it will resemble the proverbial tree falling in a forest.

Karl Schamotta, Chief Market Strategist