Jackson Hole coming, but what about the rate hike…?
As the ongoing trust in Fed is close to zero, we may eventually see a bit of nervousness before Friday. We may spot some unwinding of the big position and abrupt moves, as the market clearly doesn’t know what to think or expect from Yellen. All of that despite pretty hawkish comments from Dudley and Williams last week, supported by Fisher over the weekend. This provides a short-term strength for USD at the moment.
So what’s the bet?
Looking at 4 rate hikes? This one is off…
Dec hike, looking like…
Oct hike, Fed hurry up before US elections…
Sep hike, well, the credibility of the Fed and its officials may increase by an inch from zero…
Questions
When we look at the history, Fed is cutting the rates when stock market is really going down. But where it is now? Printing new historical highs…, so it is the time to raise rates, right?
What about housing market? Peaking again…A time to raise rates, right?
What about USD? For some reason it is still not clearly moving higher…Why?
Economy and job market getting better, GDP growth is accelerating and with inflation getting close to Fed targets…Hiking?
Investments to recover after US elections, the effects of stronger USD to fade away…
Productivity slowdown? As Fisher said, we don’t know to measure it properly…
Slowdown in China, Brexit aftermath, debt issues in Europe, US elections risks? Worth to consider…
All of these are good questions but very likely, Yellen will not provide us with any clear signal. Has she ever?
Our take
We see two hikes this year and the first one will likely come already in Sep, so there will be some time for dust to settle before US elections. For those who see the same, the long USD, underweight or short US 10yr or 30yr Treasuries, and short silver and gold, may be the right trade. The question of regaining a bit of trust of market participants in predictability and communication ability of Fed officials will be tested again.
The second hike in Dec will be really data dependent in the light of results of US presidential elections of course.
Risks
Data, data and again data. Yellen at Jackson Hole will again point to data dependency (US NFPs are on Sep 2 while FOMC on Sep 21).
From political perspective the Brexit vote shock aftermath or US elections risks are also taken into account but at the moment, the risks related to US elections, seem to be bit ignored by bond markets. But what about the Fed?
All in all, the Jackson Hole speech may be again a non-event as it was 9 times out of last 10 speeches, apart from the one in 2010, when Bernanke announced the QE2 preparation.
Good luck Champs!
Mr Hawk
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