The week of the Jackson Hole symposium usually offers many things the market can get excited about: Hints about where monetary policy may be going, the Fed’s outlook on the economy, and any significant changes to the decision-making process which may have longer-term impacts on rates.
This week, stocks can’t quite muster the courage to bounce courtesy of mixed headwinds in key data.
The trajectory in the markets has generally been upwards around the time of the summit hosted by the Kansas City Fed. In 2024, the Monday before the Wyoming conference began, the S&P 500 stood at 5,608. A week later and following the conclusion of the event, the index stood at 5,616. In 2023 the story was similar, up 4,399 to 4,433.
This year markets are showing weaker signs. The S&P 500 closed down a touch yesterday by 0.01% while the Dow Jones was down 0.076%. The Nasdaq was up a minor 0.03%.
In Europe, London’s FTSE is up 0.2% in early trading, the DAX up 0.16% and Paris’s CAC 40 is up 0.54%. Over in Asia, the Nikkei 225 is down slightly by 0.38%, Hong Kong’s Hang Seng is down 0.2% while India’s Nifty 50 is up 0.3%.
Even as European leaders descend on Washington D.C. this week to back Ukraine’s Volodymyr Zelensky in his fight against Russia, markets are still looking through the geopolitics and are focussing on the monetary policy headlines to come at the end of the week.
“We suspect Powell will not sound as dovish as market pricing,” Bank of America chimed in a note to clients this morning. “Powell’s comments will likely be more balanced than at the July FOMC meeting given the July labor report remind about upside risks to the unemployment rate.”
“We suspect the knee-jerk Jackson Hole reaction will be different in ’25 vs for most of Powell’s tenure. The bigger driver of the near-term Fed policy outlook will likely be the Sept 5 employment report, which occurs 2 weeks after Jackson Hole,” the note continued.
Previous hopes that Jackson Hole would provide the platform for a signal of rate cuts are waning by the day. Previously CME’s FedWatch priced a September cut in at more than 95%. Now that figure is dropping by the day, currently standing at an 83% chance.
The wings of dovish speculators have been tipped by the producer price index (PPI) which came in slightly hotter than expected, and suggested that tariff-related inflation is trickling through to business and may soon land in the laps of consumers. Moreover, last month’s consumer price index came back cooler than feared but still hinted at underlying tension as core inflation ticked above 3%.
That counters the downside of the Bureau of Labor Statistics surprise and its unwelcome revisions to the employment landscape. The Labor Department reported payrolls grew by just 73,000 last month, well below forecasts for about 100,000. But downward revisions for prior months alarmed investors even more, revealing that the labor market came to a near standstill over the spring. May’s tally was cut from 144,000 to 19,000, and June’s total was slashed from 147,000 to just 14,000, resulting in a combined cut of 258,000. The average gain over the past three months is now only 35,000.
Less and less convinced
Despite a number of individuals on the Federal Open Market Committee (FOMC) suggesting they would like to see a cut in the days following the labor market report, analysts are still hedging some of their bets on a cut (and increased economic activity).
“We received a slew of economic data this past week, but the true market mover lies ahead this Friday: Chair Powell’s upcoming Jackson Hole address,” wrote Wharton’s Professor Jeremy Siegel this week. Writing for WisdomTree, where he is senior economist, Siegel added: “While inflation data surprised in parts—especially the PPI with its sharp jump in portfolio management fees—the underlying story remains that price pressures are not accelerating in the areas that the Fed watches most closely.
“In fact, some prominent economists lowered their PCE inflation estimate by five basis points, despite the headline noise. That is a telling sign. It suggests that core inflation, when adjusted for statistical anomalies, is broadly in line with the Fed’s path toward easing.”
Siegel has long lobbied for rates to come down, saying monetary policy has been overly restrictive given the health of the economy. He has also argued, like many, that the Fed needs to “see through” tariff-related inflation as a one-off hike as opposed to a fundamental shift in the economy.
“We’ll get another jobs report and inflation print before the Fed’s September 17 meeting, but this Friday’s Jackson Hole speech will set the tone,” Siegel added. “If Powell acknowledges the cooling in labor markets and the benign trend in core PCE, it opens the door for a 25-basis-point cut. If he stresses the need for more data and downplays recent softness, markets will take it as a hawkish signal, and I expect risk markets to react negatively.”
