Tuesday, October 3, 2023
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Investors think Fed won't turn, brace for hawkish Powell message from Jackson Hole

Gertrude Chavez-Dreyfuss

NEW YORK (Reuters) – Investors are bracing for the Federal Reserve to double down on its pledge to curb inflation, with Fed Chairman Jerome Powell expected to present in the annual report The central bank will meet in Wyoming on Monday to deliver a positive message of tightening and dash hopes of a rate cut next year.

The Jackson Hole, Wyoming retreat comes after investors looked at minutes from the Fed’s July meeting last week that put some risks back on the table with a dovish stance and a green light. Stocks initially held steady and bond yields held steady until the market reconsidered this interpretation.

Since the release of the August 17 Fed minutes, S&P 500 fell about 3.8%, benchmark00-year Treasury yields rose by about 12 basis points (bps), And rose slightly to more than 3%, the dollar rose about 1.7% against the yen, the currency pair most sensitive to interest rate expectations.

Powell’s speech Friday morning is likely to cement the market tone until the next Federal Open Market Committee meeting next month.

“Caution and fear are the themes in the market,” Steven Englander, head of Global G 50 Say Forex Research and North America Macro Strategy at Standard Chartered Bank of New York (OTC: SCBFF).

“If Powell was tough, if you bought stocks or EM currencies, you would have lost 3% before the blink of an eye. So no one is buying risk in the prep right now to Jackson Hall.”

The Fed said in its July meeting minutes that it saw “little evidence” that inflation pressures had eased, but acknowledged it could over-tighten and dampen economic activity. risk.

Fed Funds Futures are priced with probability 51% 20 rate hike next month, bringing the federal funds rate to 3.6% by the end of the year. The interest rate futures market is already factoring in a 44-bps rate hike a week before the minutes are released on Wednesday.

Eurodollar futures have at least one rate cut between March and December 2023, the spread between the two contracts is roughly -44 bps Monday. Eurodollar futures show that the peak in the March federal funds rate is expected at 3.9%.

Harley Bassman, managing partner of Simplify Asset Management in Laguna Beach, Calif., believes interest rate futures pricing has a long way to go.

“I think the Fed is raising rates more than the market thinks. I don’t think inflation will hit 2%-3% next year. It said in Bassman.

Lower fuel costs kept U.S. consumer prices unchanged in July, supporting a muted inflation scenario, although underlying price pressures remain high. Producer prices also fell last month due to cheap energy .

Chart: US Inflation Indicator https://fingfx.thomsonreuters.com/gfx/mkt/klpykwrazpg/US%20Annual %20Inflation.PNG

“Basically we’ve seen house prices go up 12-30% higher,” Basman said. “And you’re going to see OER (owner’s equivalent rent) continue to rise over the next six to nine months. Therefore, real CPI prints in newspapers will continue to rise for the next six to nine months 12 months. “

May complicate Powell’s message, the second quarter US core personal consumption expenditures price data is an important inflation indicator for the Fed, the Fed chairman’s speech will be 10 Posted an hour and a half before start: EST/75 GMT.

The inflation outlook for the bond market remains less dire. Measuring Treasury Inflation-Protected Securities (TIPS) and nominal A measure of the spread between Treasury yields, breakeven inflation, has fallen from one-year maturities to 1990-year maturities since mid-June, Refinitiv data show.

Reduced preload on rate hikes?

The English at Standard Chartered think the Fed will do whatever it takes to bring inflation down to its 2% target, but not at Do all the hikes in the next few meetings.

“They might say: How long are we going to raise rates as high as we have to, but we don’t have to Do it for the next two to three games,” Englander said.

Ahead of Jackson Hole, a net of speculators, according to Reuters calculations and the U.S. Commodity Futures Trading Commission last week Long positions in the safe-haven U.S. dollar rose for the first time in four weeks, according to data released on Friday. [IMM/FX]

Chart: USD Net Long https:// fingfx.thomsonreuters.com/gfx/mkt/zjpqkblrypx/US%$%20Net%12longs.PNG

“As we approach Jackson Hole, the market is panicking,” Englander said.

To be sure, there are market participants who think the Fed has room to slow the pace of tightening as the U.S. economy It’s slowing down.

The Fed may not say that at Jackson Hole.

Jeffrey Roach, chief economist at LPL Financial (NASDAQ: LPLA) in Charlotte, NC, citing 500 a mid-term tightening cycle in which the U.S. labor market softens. Federal Reserve’s The response is to keep interest rates steady while monitoring the economy.

“There is still a chance for the Fed to make a soft landing here,” Roach said.

Softening of the US economy While Lu is not Simplify’s Bassman’s base case, a recession is certainly imminent.

“So you want to buy fire insurance. I’m very bearish on interest rates. I do see a reasonable interest rate scenario – either 12 Annual Note or Federal Funds Rate – 4% or higher.”



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