Week Ahead: Markets look to Jackson Hole and Powell Speech

Surging bond yields and China woes are grabbing the attention of investors in current markets which are always choppier during the summer recess. The rise in US yields – especially long yields – is probably driven by a confluence of factors with better-than-expected recent US economic data proving that the world’s biggest economy remains resilient amid the current aggressive rate hike cycle.

A yield of over 4% on the benchmark US 10-year Treasury means the dollar is well supported, though the near 4% rally in the greenback since its lows a month ago is nearing overbought territory. Meanwhile, stocks are taking a dislike to the “higher for longer” rates environment with the blue-chip S&P 500 off over 5% from its recent highs and the tech-heavy Nasdaq falling more than 6%. This summer price action will be put to the test by Fed Chair Powell’s speech at the FOMC’s annual pow-wow at Jackson Hole.

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This venue has been used by previous Fed Chair’s to announce policy shifts, so expectations are always elevated. For example, last year, Powell kicked off this unprecedented tightening cycle by saying that he would continue raising interest rates with urgency to fight rampant inflation. A powerful rally in US yields ensued which turbocharged the dollar and slammed stocks.

Things are different are somewhat different 12 months down the line, with cooling inflation, weaker hiring and moderate labour costs meaning a September pause is highly likely. But leaving the door open to more policy tightening could be the modus operandi by Powell as he probably doesn’t want to undo all the good work done by multiple hikes in the system. A slightly more hawkish tilt would tip the odds in favour of another hike which currently sit below 40% at the following FOMC meeting in November.

Major risk events of the week:

23 August 2023, Wednesday

-Eurozone PMIs: PMIs are business sentiment surveys which will give us a flavour of how Q3 is shaping up. The composite figure, made up of manufacturing and services, is now well below the boom/bust mark of 50 and is expected to remain there. The euro has held relatively well considering recent soft data and the bleak China outlook. Consolidation above 1.0835 would be constructive.

–UK PMIs: Increasing stagnation in the service sector is expected. This tallies with ongoing problems in manufacturing. The BoE will be watching to see if there are any improvements in the inflation picture, with recent core prices still stubbornly higher. Cable needs gains through 1.2758 to push back up above 1.28. The 100-day SMA and recent spike lows around 1.2620 are solid support.

25 August 2023, Friday

-Fed’s Jackson Hole Symposium: Does Fed Chair Powell follow the recent data dependent messaging? Or does he actually highlight the strong growth story, which is well above trend? The latter would mean lining up markets for a hike in November though we get a lot of data before then to sway policymakers’ decision making. Powell is scheduled to speak at 10.05 Eastern Time.

-German IFO Business Survey: This widely watched German data is forecast to decline to 86.8 from 87.3 in July. That would mark the fourth straight month that business morale has deteriorated. Europe’s economic engine has been struggling to recover after slipping into recession earlier this year.