Hawkish, dovish, hawkish, dovish? As many market participants suspect, this week's Jackson Hole 'retreat' wil be a nothing-burger with perhaps a side-dish of temporary volatility as machines quibble over various words in headlines. Former fund manager Richard Breslow warns not to expect much...
Expect to Hear Jackson Hole Is Great in August
At some level, I hope I’m wrong. This week would end up being far more interesting if we do indeed get some juicy policy announcement out of one, or, why not be greedy, two, of the big kahunas headlining Jackson Hole. But it’s unlikely and markets may well end up having to figure out what they want to do between now and autumn on their own.
As much as these folks love to talk, they probably have little intention of communicating.
What do we know?
The Fed doesn’t pre-commit. But has essentially done so on a taper announcement and commencement in the fall. Their best laid plans call for as benign a start to this process as possible. Whether Chair Yellen mentions it again is largely irrelevant. They want to do it and think they can. And they won’t if something untoward happens.
If her base case is transitory inflation and one more hike this year, this is neutral not hawkish. Or I should say uninformative. Their first priority is balance sheet and rates after. A hike requires waiting to see inflation numbers tick up. We’re going to know nothing new on this subject before the Aug. 31 release, at the earliest, of the PCE deflator.
President Draghi’s notion on timing of a taper has to be influenced by the German election. And that comes after the ECB’s September meeting. The Chancellor’s re-election is widely assumed. But peace and harmony within the Zone will be the order of the day until it is over. Periphery spreads are still tight but have begun to show signs of widening out. Another 10 basis points wider in the BTP to bund spread and things begin to look interesting.
The ECB has a much harder task than the Fed in pulling back stimulus due to the structure of the PSPP and use of the capital key. Confidently dismissing the process as harmless for markets is a luxury they can’t indulge in.
Of course, if the market "misinterprets" anything (translation - sells off), there are numerous officials willing and able to step into the breach and save the world with some clarifying "that's not what he/she meant" remark. As Breslow concludes, we have all got rather used to it...
Unfortunately, there are the speeches and then the chit chats. With all of the winks, spins and low-downs we’ve come to expect. So, no matter what is said from the podium, expect to be treated to no end of assurances as to what they really meant.
In truth, they’re buying time, hesitantly optimistic and have a plan that sounds great in theory.