Stocks, Bonds Little Moved by Powell’s Jackson Hole Speech
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Stocks and Bonds are Little Moved by Powell’s Jackson Hole Speech

By:Christopher Vecchio - CFA

So, what's next?

  • Fed Chair Jerome Powell’s Jackson Hole speech sounded hawkish, although he stopped short of promising another rate hike.
  • In a sense, Powell said what he has been saying for months; the speech was light on new information.
  • U.S. equities are marginally lower, and U.S. bond yields are mixed; the 2s10s spread is moving deeper into inversion territory.

Fig. 1: Intraday price percent change chart for /ES, /NQ, /ZT, /ZN, /ZB
Fig. 1: Intraday price percent change chart for /ES, /NQ, /ZT, /ZN, /ZB

Federal Reserve Chair Jerome Powell’s speech at the Jackson Hole Economic Policy Symposium was one of the top-billed macro events this week. However, traders expecting significant volatility around the event may be walking away disappointed: All four major U.S. equity indexes have moved between gains and losses, while U.S. Treasury bonds have sold off slightly.

In a sense, Fed Chair Powell’s speech offered little new information. Outside of his firm commitment to keeping the Fed’s inflation target steady at 2% over the medium-term—chiming in on a debate currently making its way through macro circles about shifting the inflation target to 3%—everything Powell saidFriday was a regurgitation of his comments dating back to the June Federal Open Market Committee (FOMC )meeting.

Here are the key comments:

  • “It is the Fed's job to bring inflation down to our 2% goal, and we will do so.”
  • “We are prepared to raise rates further if appropriate and intend to hold policy at a restrictive level until we are confident that inflation is moving sustainably down toward our objective.”
  • “Getting inflation sustainably back down to 2% is expected to require a period of below-trend economic growth, as well as some softening in labor market conditions.”
  • “We expect this labor market rebalancing to continue. Evidence that the tightness in the labor market is no longer easing could also call for a monetary policy response.”
  • “At upcoming meetings, we will assess our progress based on the totality of the data and the evolving outlook and risks.”
  • “Based on this assessment, we will proceed carefully as we decide whether to tighten further or, instead, to hold the policy rate constant and await further data.”

How Have Markets Reacted?

The reaction to Powell’s speech has been mixed, whereby stocks and bonds across the curve initially rallied but have since fallen back. Now, markets are mostly unchanged: the S&P 500 is down by 0.21% on the day; the U.S. Treasury 10-year yield is higher by 5 basis points (bps )when this note was written.

Thus far, the mixed reaction to the report has not done much to shift Fed rate hike expectations in the near-term: Yesterday, markets were pricing in a 19% chance of a 25-bps rate hike in September; today, there is a 16% chance, according to Fed funds futures. Odds of a November rate hike have increased marginally, from 49.3% to 50.3%.

/ZQ Fed Funds Futures Forward Curve (August 2023 to August 2025)

/ZQ Forward Curve

What Does the Fed Do Next?

The Fed is data dependent—period, end of story. There are numerous data releases before the September FOMC meeting, including the August U.S. consumer price index and the August U.S. nonfarm payrolls report. We’ll see numerous weekly jobless claims figures, and the August U.S. Institute for Supply Management (ISM) surveys as well. If the data continue to run hot (the Atlanta Fed GDPNow growth tracker for 3Q’23 is a searing hot +5.9% annualized in real terms), traders can’t dismiss another rate hike in September, but more likely November.

Regardless, none of this is new information, because Powell didn’t tell market participants anything that they didn’t already know—as one of us expected.

Christopher Vecchio, CFA, tastylive’s head of futures and forex, has been trading for nearly 20 years. He has consulted with multinational firms on FX hedging and lectured at Duke Law School on FX derivatives. Vecchio searches for high-convexity opportunities at the crossroads of macroeconomics and global politics. He hosts Futures Power Hour Monday-Friday and Let Me Explain on Tuesdays, and co-hosts Overtime, Monday-Thursday. @cvecchiofx 

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