Jackson Hole on the horizon for markets this week

I reckon the narrative going into Jackson Hole this year is rather clear. If you’re expecting Powell to reaffirm rate cut expectations, you’d be sorely disappointed. But in that sense, can we argue that market players are quite evidently favouring Powell to adopt a more hawkish tone? Or at least to not conform to the more dovish bias heading into September?

As such, it might seem that the propensity to surprise is actually on the other side of the equation now. But if anything, that argues to how high of a threshold the situation is for Powell to have to surprise markets in this manner.

In short, don’t expect Powell to be explicit or pre-commit to anything in September. However, that won’t stop markets from designing their own ideas in their heads. Fed funds futures are still showing ~84% odds of a 25 bps rate cut for next month. That is lower since the middle of last week amid inflation concerns creeping in, with Chicago Fed president Goolsbee (voting member this year) also firing a warning shot here.

It pays to wait on more data and that will be the mantra that Powell should be preaching later this week.

In that lieu, we’ll still have the next US labour market report on 5 September and the next US CPI report on 11 September. But on the latter, it will come after the FOMC blackout period begins on 6 September. So, that is an important detail to be aware of.

If Fed policymakers are to offer up any signals on September, it will be in that window right after the jobs data and before that particular weekend strikes.

Recent history would suggest that markets bullying the Fed into a decision is not much of a surprise. But in a time when policymakers might act more boldly, it is tough to factor that sentiment into the equation.

Powell seems adamant on wanting to define his legacy at the Fed as being the last stand in the wake of politicisation of the central bank and crumbling independence. Some of his peers might feel the same way and that principle could just be what gives them the courage to push back against market expectations for once.

Either way, don’t expect much from Jackson Hole. If market players want confirmation or want some form of affirmation of a rate cut for September, the biggest clue will come from the next US labour market report.