The Week Ahead: Jackson Hole, US inflation and Nvidia earnings form key tests for markets

Central bankers convene in Jackson Hole for the annual symposium hosted by the Federal Reserve. All the attention will be on Fed chair Kevin Warsh as the central bank grapples with the bond rout and subsequent intervention by the US Treasury. Meanwhile the latest PCE inflation reading will be vital to investor sentiment and how bond markets set the pace in financial markets. Gold and crypto have soared since Treasury intervened with a pledge to double the pace of buybacks in the Treasury market, while the US dollar has borne the brunt of selling pressure. In the stock market earnings from Nvidia will prove crucial to the durability of the bull market and the wider AI trade.

Here’s the key things to watch over the next week.

What will Kevin Warsh say at Jackson Hole?

The annual Jackson Hole meeting of central bankers in Wyoming coincides with the most turbulent bond market since at least 2022 and markets will be watching for clues about long-term yields and Fed independence. Bond yields have spiked to multi-year and multi-decade highs in some cases as investors proved less willing to hold longer-dated government debt for a variety of reasons. 

Among these inflation risks are paramount, with inflation proving more durable and stickier than many had assumed. The Fed got this wrong before, too late to raise rates because it assumed inflation was transitory. Now a deeper problem is emerging as markets are starting to doubt whether the Fed will follow through with its inflation-busting rhetoric at all under the new stewardship of Trump-pick Warsh. Aside from inflation equally important are risks around fiscal deterioration in the US with the government running a 6% budget deficit with the economy at full employment. Vast AI spending is gobbling up demand, too, with tech debt competing with sovereign debt.

Warsh will deliver his remarks on Friday, the first time he’s spoken publicly since the Fed’s July meeting. His comments then sparked the biggest single-day selloff in longer-dated Treasuries since Trump’s ‘liberation day’ tariffs, as he appeared to welcome the rise in long-term bond yields. An acceleration in the rise of longer-dated Treasury yields since has come as markets have dialled down expectations for the Fed to hike rates. Partly that’s down to softer CPI and payrolls numbers, but equally it’s because the market doubts Warsh’s credibility to raise rates to fight inflation. Treasury’s decision to double buybacks of longer-dated US paper has added to market concerns about political interference, and may actually raise risk premia. The Treasury move also underlines questions about Fed independence – will they act together to suppress yields, or will the Fed stick to its knitting?

A statement of the Fed’s willingness to raise rates to quell rising inflation would be one thing, but it may not be enough now as the market doubts the Fed’s resolve. Warsh has already said he won’t tolerate high inflation, yet the Fed has missed its inflation target for years and current trends don't suggest inflation will come down soon. He has also categorically refused to deliver any kind of forward guidance – a decision that seems to have added some fuel to the bon(d)fire. In the absence of clear guidance to markets on the Fed’s reaction function to inflation, volatility is filling the void. While Warsh’s pointed lack of communication is probably unsustainable in the long run, it’s doubtful he will start providing much colour at Jackson Hole, with the September FOMC meeting probably a more opportune time to set the tone. So key questions about the Fed’s view of inflation and long-term rates may be left unanswered at Jackson Hole, providing scope for further volatility across bonds, FX and crypto markets in particular. 

How high is US inflation?

US core PCE inflation – the Fed’s preferred gauge of prices, at least for now – will detail how far away the central bank is from achieving its mandate and potentially reset market expectations for the path of policy rates. Headline PCE inflation is expected to decline slightly to +3.6% YoY, while core PCE is seen holding steady at +3.3%. The data if confirmed should keep the September FOMC meeting in play for a potential rate hike. Three dissenters called for a hike in July but minutes of that meeting revealed a more hawkish lean among policymakers. While CPI inflation leant softer, leading markets to trim rate hike bets, the PCE could swing things in the other direction. Higher inflation trends could pressure on long-end bonds (where the concern is) but ultimately if the data nudges the Fed to hike sooner then it ought to tamp down on the rise in long-end yields by containing inflation expectations through a more credibility dividend.

The PCE inflation report is due on Wednesday and will be accompanied by the second reading for US GDP in Q2. Durable goods orders are also part of the mix. 

Does Nvidia still lead the AI trade?

Stocks have proved relatively resilient during the bond market selloff and Wall Street arguably has a much bigger catalyst coming up with Nvidia, the lynchpin of the entire AI buildout, reporting earnings on Wednesday, 26 August. The earnings and guidance will have crucial implications for just about everything across the AI trade. The latest earnings from semiconductor stocks indicate demand remains very strong across the AI buildout, with the likes of TSMC and ASML raising guidance. And hyperscalers can’t stop spending with Microsoft, Amazon, Meta and Alphabet expected to spend a combined $720bn-$745bn this year, benefitting Nvidia. But while Nvidia remains a key winner from the AI buildout there are structural challenges to its ongoing leadership.