JACKSON HOLE 2016
So a lot of attention has been given over to Jackson Hole and upcoming remarks from FEDS Yellen.
But what is it and what should we expect?
To start, Jackson Hole is a yearly symposium sponsored by the Kansas City FED that since 1978 has brought prominent Central Bankers, Finance Ministers, academics and let’s be honest market participants (yes those that trade the markets) together to discuss economic issues facing the world. For example, a paper that detailed the danger of derivatives and the mortgage markets were largely ignored in 2005 here a full 3 years prior to the 2008 crash.
This year the symposium is titled “Designing Resilient Monetary Policy Frameworks for the Future” and as ever the FED Chair is the highlight that traders will be waiting to hear from. As I recall, Yellen is due to speak at 4PM UK time but if I remember correctly we get a text version of what is coming up beforehand at 3PM UK time. I must admit I may be wrong on this but hopefully we can clarify nearer the time. Or someone can tell me I am wrong!
So what should we expect?
Well, let’s cast our minds back. What have we heard in the last 2 weeks or so? We have had a fair amount of Hawkish chatter in the markets. We have had FEDS Dudley say that rate rises should be expected this year, followed the same day by Lockhart reaffirming the same thing. The bond markets took this to heart, no pun intended, and sold off quite nicely for the rest of the day. The S&P, however, largely ignored this and continued it’s merry way to new highs. And the dollar, likewise, decided to ignore comments and we saw weakness from the dollar that day. Of course, the next day bonds readjusted and came back from their sell-off confirming that all should be ignored.
We then got the FED minutes which were largely decided to be less hawkish than feared and we took note of anything that could be deemed dovish. This time it was that inflation wasn’t near enough target and that more data was needed and that if they were wrong timing wasn’t a major factor and there was plenty of time to adjust policy. Queue a bond move back up, new highs again for the S&P and a limp dollar.
Added to the mix we have recently seen Fischer get hawkish, Williams get hawkish and then Williams get dovish saying maybe it is time for Central Banks to develop new tools and tinker with higher inflation targets or GDP targets.
And all this confusion is exactly why we are looking at Jackson Hole to give us some clarity. So far the markets have discounted hawkishness and the pricing suggests that only 18% see a September hike, 26% for a November hike and it’s 50/50 for a December hike. As a side note remember we are in an election process in the US which adds weight to the mindset we don’t hike before the November election.
So, in essence, over the last months the market has discounted any hint of hawkishness and firmly disbelieves that rates will move in September. And that is why, in my opinion, if Yellen wants to avoid a total shock to the system she must use Jackson Hole to deliver this message clearly and without ambiguity and give the markets time to adjust to the idea that rate hikes are coming. Or at the very least test the waters as to the markets reaction because let’s be honest with credibility a thing of the past for most Central Banks if she does deliver a message that the market does not like her mind will very soon be changed if the S&P is trading 10% lower come September.