That is the question everyone is asking today ahead of Yellen’s 10am ET speech which will be titled “The Federal Reserve’s Monetary Policy Toolkit.”
The odds are low, considering that 85% of Wall Street respondents in a recent Citi survey expect a “dovish hike signal.” To be sure, a BofA’s Michael Hartnett noted earlier this week, “only once in the past 10 years has Jackson Hole been a big market mover” namely in 2010 when Bernanke signaled QE2. He does concede that Jackson Hole in 2016 has volatility potential given:
- Wall Street’s dependence on the Liquidity Supernova: annualized return from global government bonds YTD is 20%, the second highest return in 30 years; current bull market in US stocks (2723 days) is 2nd longest ever; at or close to all-time highs: global government bonds, IG bonds, HY bonds, EM debt, REITs, US stocks, staples, discretionary, industrials, utilities.
- Investor excess positioning in assets tied to “zero-rate” expectations
- Recent Fed hints (in particular by Brainard & Bullard) that they are capitulating on their long-held forecasts of higher growth, inflation & interest rates…forecasts which continue to be stubbornly ignored by the market (see contrast between Fed & market dots)
- Expectations for a dovish Fed are coinciding with macro strength in the US (most obviously in housing & consumer spending) as well as highest level of wage inflation since Jan’10 (Chart 4). If average hourly earnings push above 3% YoY, it will be hard for bond yields to remain so low. But the biggest catalyst for higher yields would be stronger economic data in Europe and Japan, reversing the DM demand for Treasuries.
- Powerful rally since Feb lows which coincided with Yellen’s second day of Humphrey-Hawkins testimony: global stocks +21% (led by EM & Pacific ex-Japan), commodities +27%, HY bonds +18% and EM bonds 13%; in addition, Brent crude oil has rallied 65% (Table 1);
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Here is a more direct anwer to just this key question, provided by Deutsche Bank’s Jim Reid who leads off this morning’s note with, what else, a question whether “Yellen will shock today?”
Because the month has been so dull, perhaps markets are getting too excited by the prospects of a meaningful speech by Yellen today that will give us a lot more clues on immediate Fed policy. However be warned because as DB’s George Saravelos pointed out yesterday, she has not traditionally used Jackson Hole as a vehicle to focus on policy guidance. Last year she didn’t attend and the year before her speech had no real immediate policy focus. Will this year be any different? The title of the speech is ‘The Federal Reserve’s Monetary Policy Toolkit’ and scheduled for 3pm BST/10am EST. There is no Q&A which might also lessen the impact. After listening to Saravelos yesterday, this morning I had a quick think back as to whether even Bernanke used Jackson Hole as a policy shaping platform. From a quick scurry through the archives, perhaps the only time was when QE2 was hinted at in 2010. So markets have probably subconsciously elevated the importance of the symposium for FOMC clues ever since.
Even if Yellen does comment on near-term policy would she really want to pre-commit to an imminent hike before September’s payroll? Probably not and therefore we’d expect her to be more ‘data dependent’ and more dovish in her comments than some of the recent Fed speakers who have been clearly itching to raise rates with less regard for the data.
It’s worth also noting that ECB President Draghi is skipping the Jackson Hole for a second successive year. There is however a potentially interesting panel discussion taking place on Saturday which will see the ECB’s Coeure and the BoJ’s Kuroda participate alongside the Governor of the Bank of Mexico. With high expectations for further BoJ action in September it’ll be interesting to see if Kuroda in particular is any more transparent.
That said, while expectations of hawkishenss are low, as we reported earlier today they are rising: Fed funds futures indicated a 57% chance of a rate hike this year, up from 36% at the end of July, while the probability of a September rate hike has rien to 32%, up from 22% a week ago, and the highest since Brexit.
This was catalyzed primarily by a series of hawkish Fed speeches in the past week, with Kansas City Fed President (and FOMC dissenter) Esther George reiterating her call that higher rates are warranted, while Dallas Fed chief Robert Kaplan said “the case is strengthening” for another increase. The comments by George and Kaplan came after New York Fed chief William Dudley and his San Francisco counterpart John Williams signaled a rate increase could be on the table in coming months. Vice Chair Stanley Fischer said Sunday the U.S. economy is close to the central bank’s goals and he expects growth to pick up in the future.
Others disagree that any imminent “shock” is on the horizon: “The probability of a September rate hike, we think is still relatively low,” Mike Amey, a London-based money manager at Pacific Investment Management Co., said in an interview on Bloomberg Television. “The last set of minutes were not particularly hawkish. So they’ve had the opportunity to take a more aggressive stance for September if they wanted to, but we do think there’s a decent chance they move before the end of the year.”
Utimately, and as always, the decision is all in Yellen’s hands.
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Finally, for traders, here is perhaps the most somber take courtesy Bloomberg commentator and former trader, Richard Breslow who says that Yellen Needs to Retake Control of the Situation
Well, we made it. It’s finally Janet Yellen day. Has a speech by a Fed Chair ever been anticipated, dissected and stressed over to this extent? It’s partially down to the fact that she has largely, even unprecedentedly, made herself unavailable for public comment. Sending her minions out to confuse us. But more distressingly, they have put themselves in a situation where a measly 25 basis points looms like a life-changing event.
How quaint it seems to remember when we used to debate how much they might do. We’ve been reduced to considering whether even a hawkish hint could throw the global financial system into cardiac arrest.
Truth be told, not even the equity market will suffer for long from a one hike and low neutral-rate message. Yet, even this notion seems to require smelling salts all around.
And the Fed has no business at this point forcing investors to continue to ramp up risk in every manifestation. They’re reinforcing the walls of the leverage prison from which they see no escape FOMC members have embraced the notion that the world’s fate hinges on their every move and that’s affected their judgment and, frankly, adversely affected their forecasting abilities. They’re desperately afraid of ever being wrong again after the dot-plot fiasco earlier this year. And have utterly confused forward guidance with investor manipulation.
The dollar was up last year on Fed-created expectations of aggressive rate increases. The Bloomberg dollar index is down 7% from January’s high after investors realized they were being fed hope and prayer rather than a believable plan. Yet now they worry that one hike could send things soaring.
So, one way or another, today is a big deal, largely of their own making. Yet another reason they should consider getting off the schneid.
Don’t forget, while Chair Yellen is the most important speaker, the event is well attended by a lot of other central bankers who might have valuable information to impart on their own plans