By Craig Erlam
The day we’ve all been waiting for has finally arrived as Jerome Powell prepares for his keynote speech at Jackson Hole.
Powell will have chosen his words very carefully, all too aware of the consequences of even the smallest deviation in his intended message. It’s a little ridiculous that markets put so much weight on such things, but that is the situation we are in and I expect the Federal Reserve Chair will be very clear in the message he wants to send.
The difficulty for Powell stems from the fact that there’s the message investors desperately want to hear and the one they’ve repeatedly ignored since the July Fed meeting.
The “dovish pivot” played nicely into the hands of the perma-bulls who have waited impatiently for the stock market to recover. Despite policymakers’ best efforts, attempts to correct this narrative have been brushed aside and the view is that Powell may try to address this in a more forceful and convincing way.
If he fails or gives the slightest impression that there is any substance to the dovish pivot narrative, we could see yields slip and stock markets end the week on a high.
That could come intentionally, or otherwise, but investors will be clinging to his every word for even the slightest hint. Especially in light of the recent inflation reading. No pressure.
Plenty of US economic data
There’s plenty of economic data due from the US later that will have a big role to play as well.
Ahead of the speech, we’ll get income, spending and core PCE price index data, the latter of which is the Fed’s preferred inflation measure. The timing couldn’t be better.
The UoM consumer sentiment survey is also released around the time his speech starts which will also be interesting, given that it’s languishing near its lowest level in decades even as spending remains strong.
The pound fell Friday morning after it was confirmed by Ofgem that the energy price cap will rise by 80% in October, taking the average annual household energy bill to £3,549.
It’s the moment many have feared for months and to make matters worse, the eye-watering hike was accompanied by a warning that prices are continuing to rise ahead of the next revision in January, with Cornwall Insight suggesting the cap could hit £6,616.37 next year.
While looking that far ahead leaves enormous room for error if this year is anything to go by, that is devastating for so many and will require immense government support.
It will also make the job of the Bank of England horrifically hard, with its previous projection of inflation this year peaking at 13.3% now looking unrealistically optimistic. Five quarters of contraction may also start to look like the optimistic scenario at this rate.
Japanese inflation rises
Contrast that with inflation in Japan, where the Tokyo CPI rose to 2.9% y/y in August and only 1.4% ex-fresh food and energy. It’s no surprise the central bank is pushing back against the need to tighten monetary policy at this point in time.
Of course, it’s easy to say that when the pressure on the currency and bond yields have eased over the last six weeks. That could well change if Powell strikes a hawkish tone and triggers another jump in yields and the dollar.
Oil steadies around $100
Oil prices are a little higher, with Brent hovering around $100 a barrel and WTI above $93.
It’s been well supported this week by comments from Saudi Arabia Energy Minister Abdulaziz bin Salman who claimed there’s a disconnect between market pricing and fundamentals, suggesting OPEC+ could cut output in the future.
Suddenly the prospect of a nuclear deal between the US and Iran, or a global growth slowdown, isn’t quite the bearish development for oil that many hoped. Although in reality, the group was never going to sit back and watch the price tumble as the world was flooded with extra oil or demand growth stalled.
Gold holds hope of $1,800
Gold is pulling back again ahead of Powell’s speech. A hawkish message could be a blow to the yellow metal as it may lift the dollar and US yields which have typically not been positive for it.
That said, investors have been far more open to any remotely dovish message, so this could be far more impactful and potentially bullish for gold, which will still have an eye on $1,800.
A move lower could see support tested around $1,730.
Crypto hoping for dovish Powell
Everything seems to require the need to reference back to Jackson Hole and Powell and bitcoin is no different.
Last Friday’s sell-off has left bitcoin vulnerable ahead of the Fed Chair’s speech and crypto bulls will be hoping for anything dovish that could help it get back on its feet.
The opposite could see $20,000 come under pressure.
Craig Erlam is Senior Market Analyst, UK & EMEA at OANDA
Opinions are the author’s, not necessarily that of OANDA Global Corporation or any of its affiliates, subsidiaries, officers or directors. Leveraged trading is high risk and not suitable for all. Losses can exceed investments.