The events at Jackson Hole are legendary, because they have been seen as turning points in central bank policies time and again. In particular, former Federal Reserve (Fed) Chairman Ben Bernanke used to give hints about the twists and turns of the Fed’s quantitative easing programmes almost every year at Jackson Hole.
Investors ‘hungry for guidance’
The problem was that it always took investors a while to figure out what the storyline was; only a few central bank policy meetings later would it become clear what the Jackson Hole announcement had been all about. ‘Reassessing constraints on the economy and policy’ is this year’s theme. It would be surprising if the masters of money come up with a proper reassessment, let alone a few tangible action points come Saturday. After all, this is not a corporate management offsite. However, hope springs eternal, with investors desperately hungry for guidance.
Jackson Hole’s economic impact in focus
Fed Chairman Jerome Powell will certainly use his speech on Friday to restate the Fed’s resolve to get inflation under control. At the same time, we expect the Fed to maintain its data-dependent stance and its reluctance to pre-commit itself to the next monetary policy actions to be taken at the September Federal Open Market Committee (FOMC) meeting.
Additional rate hikes are on the agenda, as inflation remains elevated, and the economy is still strong according to various measures. The labour market remains a major support and so does industrial activity. Softening demand, weaker private consumption expenditure and construction activity are the major reasons why the Fed has the room to consider slowing the pace of interest-rate hikes from 75bps in the last two meetings to 50bps in its September FOMC meeting. Financial markets currently attach a 50 per cent probability to both – a hike by 50bps or a bigger step of 75bps.
A new round of inflation and labour market data will most likely be the determining factor helping the FOMC decide.
How involved are officials from Europe?
Central bank officials from Europe also have the opportunity to give some hints about how their monetary policy will deal with high inflation and slowing activity. European Central Bank (ECB) executive board member Isabel Schnabel and Bank of England Governor Andrew Baily will be present at Jackson Hole, while ECB President Christine Lagarde does not plan to attend.
The ECB response to high inflation has been much less resolute than actions by the Fed and the Bank of England so far. We expect the ECB to hike rates in September by 25bps, while consensus forecasts a hike by 50bps, a view that is currently fully discounted by financial markets.
So far, the ECB has shown strong commitment to price stability, but has refrained from aggressive monetary policy tightening. More pronounced growth risks in Europe compared to the US support the ECB’s stance, while persistently high inflation readings increase the pressure on the ECB to hike more aggressively.
Upcoming inflation readings and activity data releases before the next ECB council meeting will play a vital role by tipping the ECB council in one direction or the other. Like the Fed, the ECB is becoming increasingly data dependent and is moving away from signalling its interest-rate decisions well in advance. Hence, central banks remain a source of financial market volatility.
Europe in focus
The media used to bridge the summer slump by spreading gossip about celebrities or resurfacing the Loch Ness (i.e. ‘Nessie’) monster in the good old days. This year in Europe, however, it was all about apocalyptic crises related to the expected energy shortages this coming winter. By no means do we want to downplay the challenges for European societies in the months ahead. Instead, we prefer to highlight the achievements made so far and the available policy options, which are substantial (see ‘number of the week’ below).
Number of the week
The situation on the European energy market is leading to a massive shift in profits, which can be observed on both the business and the government side, such as in the above-mentioned account or in energy-related value-added tax cash flows.
So what should investors do in this environment? We reiterate that traders should take profits, while investors should stick to a defensive growth tilt.