Markets lose enthusiasm for Jackson Hole as new risk factors capture market imagination
The markets are calm, if a little lower, as we wait for the much-anticipated Jackson Hole symposium, which is now all-virtual due to the US’s surging Delta variant Covid infections. The question now is, can stocks continue to rise post-Jackson Hole, in line with Treasury yields? The 10-year US Treasury yield jumped 6 basis on Wednesday, the 1-year yield was up slightly at 0.07% and the 2-year yield, which is most sensitive to the short-term changes in Fed policy, is roughly stable at 0.23%. Thus, as we move towards Fed chairman Jerome Powell’s speech, the market appears to be pricing in little near term change, however, he may stress that the bitter pill of monetary tightening will be coming down the line.
Why the Fed won’t rock the boat
Unless we get a major shock from the Fed governor at the end of this week, it is hard to see how his words will lead to a bout of volatility and stocks careering lower. It’s worth remembering that an unwritten rule for the Federal Reserve and other major central banks is to maintain the status quo. That is why a 6 bp jump in 10-year Treasury yields on Wednesday only triggered a small decline in European stocks in the morning session in Europe. Investors are waiting for Jerome Powell to set the tone for autumnal markets, but as we mentioned above, this isn’t what most central bankers want to do.
Due to the backdrop of rising Covid infections in the US and around the world, the prospect of vaccine immunity waning just as the West waits for the winter months, Powell and co. will have had a good meeting if they can say their piece without leaving too much of an imprint on financial markets. The markets are rapidly losing enthusiasm for his speech, as the latest news on rising Covid cases makes it likely that Powell does not divert too far from the minutes of the July FOMC meeting: tightening is coming, but not until next year, and not until coronavirus is under control.
Why corporate America could end the Covid pandemic
Instead, the market is looking at the next red flag for risk assets – the August NFP report, which is released on Friday 3rd September. This will be a key report due to the rising Covid infection rate in the US, especially in the Southern States, and the impact this could have on economic growth. So far there hasn’t been state-wide lockdowns to control the spread of infections, and instead the focus has been on how quick state and Federal governments can marshal booster vaccines and persuade the unvaccinated population in the US to get a vaccine. Interestingly, some employers in the US and elsewhere are mandating vaccinations for employees or they are doing what Delta, the airline, has announced and are charging workers who are unvaccinated for extra health insurance. Employers are taking Covid safety into their own hands, which should have a knock-on effect for risky assets. If employers are helping to prevent the spread of Covid by mandating vaccinations, then it could reduce the likelihood of future economic lockdowns and help the global economy learn to live with Covid.
Tech and Bitcoin, what to expect next
Tesla and other tech stocks have recovered from their mid-August slump, and are possibly attracting more interest now that Chinese tech shares are selling off once more. The Nasdaq is rolling over from its record high. This also reminds us that the market is not expecting hawkish talk from this week’s Jackson Hole meeting, as tech stocks are sensitive to the threat of higher interest rates.
DoorDash, one of last year’s tech darlings, has also had a strong performance in August, although this stock tends to rise when the threat of Covid infections are high, thus we could see its fortunes fade once the latest wave of US covid infections crests. Interestingly, bitcoin is down more than 4% on Thursday and is currently hovering around the $47,000 mark. This decline is most likely down to technical factors, the rise of other crypto alternatives and due to monthly options expiries. If you are looking for volatility in otherwise dull, August markets then crypto is the place to be. However, bitcoin’s decline on Thursday is a keen reminder that you cannot use fundamental analysis when you trade bitcoin et al. Arguing that bitcoin is being used as a hedge against central bank largesse doesn’t always cut it when it comes to explaining what the crypto market is doing. It often moves to the beat of its own drum; thus, its latest move lower could be a temporary bout of downside volatility before it comes roaring back to life.
The dollar comes back to life in time for Jackson Hole
Elsewhere, the FX market has been a bit livelier this week, after a weakening of the dollar at the start of this week, which saw GBP/USD rise above $1.3760 and EUR/USD attempting $1.18, the dollar is coming back to life as we lead up to the Jackson Hole meeting. The dollar index is back above 93 on the back of comments from the Fed’s Bullard who said that he was sceptical about inflation coming back under control in 2022. Even though US jobless claims ticked up, and real GDP for Q2 was revised down slightly, the US economy remains strong and this is providing a boost to the buck. GBP/USD is down more than 0.3% on Thursday as concerns about Brexit-related shortages is leading some analysts to downgrade the prospects for growth in Q3 and beyond. Added to this, there is a risk that the UK is falling behind other G7 nations when it comes to booster Covid vaccine shots, which are only starting to be rolled out in September to the most vulnerable. Thus, September could be a worrying month for the UK if there is not a broad-based plan for mass booster shots and if rising cases and waning vaccine immunity leads to a more prolonged and deadly Covid outbreak. Thus, we could see GBP struggle in the near term, with BOE Governor Bailey’s speech at the Jackson Hole symposium the next key event to watch for sterling.