Focus on Jackson Hole

By David Morrison  |  21/08/2018 14:47

It’s a quiet week for economic data and the earnings season is effectively over. But traders will pay close attention to what Jerome Powell says on Friday

We’re really stuck in the late summer doldrums. There’s still two weeks to go before US Labour Day which unofficially marks the end of summer and the start of the move out of the third quarter and into year-end. Hopefully that’s not too depressing for everyone, and hopefully we’ll get another blast of decent weather before we head into the autumn.

European indices trade sideways

Market-wise, these summer doldrums are best illustrated by a quick glance across the main European indices. The UK’s FTSE 100 has gone sideways since June as have the French CAC and the Spanish IBEX. The German DAX has seen a bit more volatility but with an overall downside bias while the Italian FTSE/MIB has also lost ground since the beginning of June. In Asian Pacific markets, the Japanese Nikkei is essentially unchanged over the same period while China’s Shanghai Composite remains in bear market territory – despite a bounce this week thanks to some intervention from Chinese authorities which also boosted the yuan.

US indices trending higher

But the US majors tell a different story with the S&P 500, NASDAQ 100 and Russell 2000 all within a few points of their record highs. Only the old-school price-weighted Dow Industrial Index is lagging. In addition, there’s every chance that the S&P 500 will chalk up the longest US bull market in history if it holds up through Wednesday. At 2,860 this would represent a gain of 329% from the low of 666 from March 2009.

Trump criticises the Fed

No doubt we’ll see a tweet from President Trump to mark the occasion. And maybe he’ll also take the opportunity to once again warn the US Federal Reserve, and his appointee as Chairman, Jerome Powell, not to raise interest rates further. This is precisely what he did yesterday in an interview with Reuters, saying the Fed should do more to help him to boost the economy. On top of this, Trump also accused China of manipulating its currency and said there was little hope of progress in the ongoing trade dispute between the two countries in talks due this week. Given the sharp positive reaction last week to the announcement of these talks, it speaks volumes that US equities barely reacted to the president’s comments. The takeaway is that investors, like Trump, see the US as the ‘winner’ from the ongoing tariff tit-for-tat. Whether this will still be the case if the trade war escalates over the coming months remains to be seen. Certainly, if President Trump thinks the yuan is too cheap with a USDCNY rate around 6.85, he’ll blow a gasket if it goes on to break above 7.00.

Jackson Hole

This week’s economic calendar is relatively empty, although we do have minutes from both the Fed’s and the ECB’s last monetary policy meetings and US Durable Goods. But the focus is the Jackson Hole Economic Symposium which takes place from Thursday through to Saturday. And the highlight of that event will be Fed Chairman Jerome Powell’s speech on Friday afternoon. This won’t be broadcast, so investors will be looking out for the transcript release. What is on everyone’s mind of course is whether Chairman Powell still believes that the US should see two more rate hikes by year-end. On top of that, we’ll want to see if he gives any clues over how much quantitative tightening we may get in future. Any suggestion that Mr Powell is prepared to pull back on monetary tightening could lead to a sharp sell-off in the US dollar and a corresponding rally in precious metals. But if the Fed Chairman stands up to Trump’s implicit criticism and makes it clear he feels the US economy is robust enough to take further rate hikes (and the ongoing wind-down in the Fed’s balance sheet) then there’s a good chance the dollar remains strong. There’s decent support for the Dollar Index around 95.00 which roughly corresponds to EURUSD resistance around 1.1600. These are important levels to watch as we go into the weekend.
 
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