Jackson Hole Preview
Head of Macro Analysis
Summary: This year should confirm that we are well into a global monetary policy reversal as a growing number of central banks has decided to cut rates in the past weeks. What we know so far is that Fed’s Powell is expected to deliver his speech on Friday. We don’t have the list of speakers yet, but the focus should be on “Challenges for Monetary Policy”.
Like in previous years, the annual Jackson Hole symposium that will take place on August 22nd and 23rd will certainly be a major market-moving event. It is usually the best place for central bankers to hint at new policy moves. In recent years, Bernanke gave clue about the launch of QE2 and QE3, Draghi announced the possibility to start asset purchases in the euro area and SNB’s Jordan confirmed the need for further unconventional monetary policy just a few months after removing the CHF cap in 2015.
This year should confirm that we are well into a global monetary policy reversal as a growing number of central banks has decided to cut rates in the past weeks. What we know so far is that Fed’s Powell is expected to deliver his speech on Friday. We don’t have the list of speakers yet (it should be announced very soon) but the focus should be on “Challenges for Monetary Policy”, including discussion about implications of divergence in interest rates, impact of QE on capital markets, new mandate of central banks and path to normalization.
What we expect:
- Central bankers should confirm they are ready to act preemptively again in order to extend the current business cycle and avoid a recession. Looking on the macroeconomic front, there are many reasons to worry. We see that nine major economies are in recession or on the verge of it, notably Germany, the United Kingdom, Italy, Brazil and Argentina. For some of them, risks to growth clearly result from the impact of trade war, but for some other it is mostly the consequences of bad politics and bad policies implemented other the past years.
- As this is the current market focus, it is likely that central bankers will give their view on the inverted yield curve. Once again, they will probably dismiss the significance of it. Interestingly, on that matter, the Federal Reserve Bank of Saint Louis has recently published a paper on the relation between yield curve inversions and recessions (you can have access to it here). The conclusion is clear: "In Germany, France and the USA, almost every yield curve inversion was followed by a recession within a few years, suggesting that false positives may be unlikely in these countries". We can always debate whether this is the best way to predict recession, but we should agree that recent inversion is the signal that the bond market considers that long term growth prospects are weak, which I tend to agree with.
- Fed’s Powell could downplay potential of 50 basis point cut in September. Depending on the metrics we refer to, investors firmly consider there is room for cutting by 50 bps next month (likelihood of 35% according to the CME and 48% according to Bloomberg). The higher the expectation…the bigger disappointment. Therefore, we cannot exclude market turmoil again if Powell is too careful regarding the Fed’s next move and communicates on a 25 bps cut.
- How low can policy rates go? We may have an answer to that question this week. A recent Bank of Japan’s paper on “reversal rates” concludes it is at minus 1% for the eurozone. It seems to imply there are still a lot of room for the ECB to lower deposit rate in September… (access here).
- Last but not least, central bankers should warn against the risks related to currency war, in relation to the USA designating China as currency manipulator. The currency war is the natural extension of the trade war, but the risk is elevated that it ends up in higher public indebtedness and inflationary storm, as it was the case in the 1970s.
Latest Market Insights
Outrageous Predictions 2023: The War Economy
- The constantly growing global need for energy drives the world's richest to huddle up and launch a R&D project in a size the world hasn't seen since the Manhattan Project gave the US the first atomic bomb.
French President Macron resignsThe political stalemate in France and the rise of Marie Le Pen following the 2022 elections corners President Macron, forcing him to give up on politics and resign from his position. At least for now.
Gold rockets to USD 3,000 as central banks fail on inflation mandateAs markets and central banks realise that the idea that inflation is transitory is wrong, and that prices will remain higher for longer, gold is sent through the roof, hitting a price tag of USD 3,000
EU Army forces EU down path to full unionWith continued challenges in the region and a US military that isn't aggressively enacting its former role as global policeman, the European Union agrees to create its own armed forces, bringing the whole region closer.
A country agrees to ban all meat production by 2030In an effort to become one of the global leaders on the path to net-zero emissions, one country decides to not only put a heavy tax on meat, but to ban domestic production entirely.
UK holds UnBrexit referendumFollowing a recession and domestic pressure, the United Kingdom is thrown into political turmoil that will end with a vote to wind back Brexit.
Widespread price controls are introduced to cap official inflationHistory tells us that with the war economy comes rationing and price controls. And this time is no different, as policymakers introduce strict price controls that lead to a range of unintended consequences.
OPEC+ & Chindia walk out of the IMF, agree to trade with new reserve assetSanctions against Russia have caused widespread turmoil due to US Dollar moves in countries across the globe that don't consider the US an ally. To relieve themselves from this, they leave the IMF and create a new reserve asset.
USDJPY fixed to the USD at 200 as Japan overhauls financial systemFollowing the challenges that faced the Japanese Yen in 2022, the Bank of Japan attempts to keep the currency from sliding. Unsuccessful on the long-term, Japan will launch a reset of its entire financial system.
Tax haven ban kills private equityWith the war economy comes an increased focus on national interests and sovereign nations' ability to assert themselves. In that regard, the OECD countries turn their attention on tax havens and pull the big guns out, banning them altogether.