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Trading grinds to a halt as central bankers go off to summer camp

Financial markets are in stasis this morning ahead of a series of monetary policy speeches at the Jackson Hole Economic Symposium. Treasury yields are up slightly and equity futures are licking their wounds after yesterday’s buy-on-rumour, sell-on-news dynamic in Nvidia shares saw the major indexes lose altitude.

Trade-weighted measures of the dollar are holding near three-month highs as market participants bet Federal Reserve chair Jerome Powell will deliver a relatively-hawkish “higher for longer” message, followed by a more dovishly-cautious one from the European Central Bank’s Christine Lagarde. Both the euro and pound are oscillating around key technical levels, and modest gains in the yuan and yen are evaporating as the session progresses. The Canadian dollar remains depressed on a widening in expected growth gaps relative to the US.

North America

In this morning’s address, we think Mr. Powell will make the case for a more gradualist approach to making rate decisions over the coming months, while warning markets not to expect rate cuts until inflation risks have been decisively vanquished. The growth backdrop brightened materially in recent weeks even as markets resigned themselves to higher long-term borrowing costs, achieving some of the key parameters of the “soft landing” scenario Fed officials have long tried to engineer – and we don’t believe he will want to tilt against the tightening in financial conditions currently occurring.

But this hawkish message is – arguably – already priced into current interest rate curves, and the deep uncertainties facing the economy will limit the extent to which he can deliver anything that resembles forward guidance. We think the balance of risks relative to prevailing positioning would argue for a small relief rally in the minutes after 10:05 – but to paraphrase former chair Alan Greenspan: If Powell seems unduly clear to markets, they must have misunderstood what he said. A bigger-than-anticipated reaction could prove extremely short-lived.

Number of rate hikes or cuts currently priced in

In media interviews yesterday, two senior Fed officials suggested that the central bank’s tightening cycle was nearing its conclusion. Boston’s Susan Collins – a non-voter- told Yahoo! Finance “We may need additional increments, and we may be very near a place where we can hold for a substantial amount of time”. On CNBC, Philadelphia’s Patrick Harker – voting member of the Federal Open Market Committee – said “I think that we’ve probably done enough… We’re in a restrictive stance, and I’m in the camp of – let the restrictive stance work for a while, let’s just let this play out for a while, and that should bring inflation down”.

The University of Michigan’s final consumer sentiment index for August – due for release just as Jerome Powell’s comments are published – is expected to hold steady at 71.2, unchanged from the early-month reading. The inflation expectations component is also seen remaining well-anchored, with year-ahead forecasts sitting near 3.3 percent (note that consumer price expectations are almost always biased to the upside relative to prevailing and realized rates).


European Central Bank President Lagarde’s speech – scheduled for 3:00 this afternoon – will be carefully parsed for signs of a softening in inflation-fighting resolve among the bloc’s central bankers. She can hardly fail to ignore recent signs of an economic downturn after a series of data releases in the last few weeks – including this morning’s revised German gross domestic data print – carried the unmistakable whiff of a recession, prompting a flock of previously-hawkish bank officials to shift in a rhetorically-dovish direction. But we think she is likely to talk tough on raising rates into restrictive territory, buying some optionality ahead of the September policy meeting.

The euro is trading near a two-month low around the 1.08 mark after briefly plunging through its 200-day moving average earlier this morning. Further downside would seem to be in the cards, yet – although next week’s data should show headline inflation falling at an accelerating clip across the bloc – core price growth might hold around 5.5 percent year-over-year, putting the central bank between a price stability rock and a hard economic place. Odds on a hike could easily recover this afternoon – or in coming weeks as markets reassess the gap between current policy rates and underlying inflation prints.

Annual % change in harmonised consumer price indices, %

The British populace kept calm and carried on in August as inflation pressures subsided somewhat and real wage growth accelerated. Survey data from GfK, released this morning, rebounded aggressively, with consumers turning less skeptical on the economic situation and their own finances – even as both measures remained firmly in negative territory. The pound leapt upward on the print, reversing earlier losses that brought it close to the 1.25 level against the dollar.

Asia Pacific

Japan’s yen is trading on a weaker footing after Tokyo’s inflation rate slowed again in August, helping lend credence to the central bank’s “transitory” view on exogenous price pressures.
Consumer prices excluding fresh food rose 2.8 percent year-over-year in the 14 million-strong city, down from 3 percent in the prior month – aligned with the Bank of Japan’s expectations for a deceleration toward 2.5 percent by the end of March 2024 as import costs come down and domestic wage pressures subside. However, the so-called “core-core” index – more closely aligned with measures of underlying inflation in other industrialized countries – stayed stuck at 4 percent, unchanged from July’s reading.

Consumer price indices, annual % change

The Chinese yuan got a short-lived boost last night on reports of an easing in mortgage rules, but the effect disappeared almost as quickly as it appeared. The official Xinhua news agency said the government would loosen qualifying restrictions on first-time homebuyers and extend tax rebates on home repurchases – but the steps were widely expected, and are generally considered unlikely to bolster sentiment in what remains one of the world’s biggest and most clearly overheated asset classes. In many Chinese cities, the home price-to-income ratio is between 20- and 40-to-one, and the property sector is believed to be worth at least $60 trillion on paper. To put this in perspective, the price-to-income ratio in New York is around 10.4 and San Francisco is near 12.3, US residential real estate is worth $34 trillion, and the combined value of all US equity exchanges is less than $47 trillion.

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