The Morning Hark - 25 Aug 2023 - Jackson Hole One Pager

Today’s focus... JPow

What he should say… 

• Repeat the data-dependent narrative of the last Fed meeting.

• Acknowledge strong growth and deflationary pressures but repeat the higher for longer mantra as the Fed’s job is not done, inflation is still above target, and we’re only halfway through his infamous list of ECI, 2*NFP and 2*CPI before the Sept meeting. 

• There are no Fed deliberations at JH, and with Sept also being an SEP meeting, how far can he adjust his message from what he’s said in the past without consensus support from the committee or ahead of a new set of economic staff forecasts in just a couple of weeks.

• As the DXY enters the meeting at 2month highs (EURUSD < 1.08, USDJPY > 146), Harkster HQ will focus on 4 parts of the US curve over the speech… Sept pricing (currently 15% chance of a hike), Nov pricing (40% chance of a hike), 10yr nominal yields > 4.2% and of course 10yr real yields closing the week sub 2%. Low fixed income vol and a market sitting long USD ahead of a bank holiday weekend, the laundry day pain trade of a “nonevent” speech from JPow may be an unwind of dollar longs and further pressure taken out of global fixed income. Lower FI vol, lower vix vol and some USD hedges get reduced.

What he could say ….

• USD Bulls will be looking for signals that we’ve not yet restrictive and that more hikes will come by year end as the economic data, in particular the GDPNow forecast is vastly exceeding expectations whilst the labour market remains strong (e.g. yesterday’s initial claims) and of course, the risks of re-acceleration of inflation into year-end are apparent in base effects alone. Look for 10s > 4.35% and DXY stronger led by G10 where US carry outperforms JPY, CHF, EUR etc etc

• USD Bears: Job done, we’ve hit restrictive territory and market pricing in 2024 is correct (cuts can come by Q4)… leading indicators (PMI’s and housing data) point to economic slowdown in the quarters ahead. (Long AUDUSD / short USDZAR as money goes to work)

• USD Bear dream land …. The Fed move the goalposts or JPow opens the discussion of adjusting the target to 3%. (WSJ: Will the Fed Move the Goalposts on Inflation? … even a hint that this is possible and the market will run with it given how long USD short term players sit (WSJ: The Fed’s Pro-Inflation Critics Are Off Target). However, given MMT and the Fed looking for a long-term average of inflation around 2%, why would JPow take this inflationary risk at this stage???? His credibility post transitory is lower than the Oakland A’s wage bill or Man Utd’s title odds …. 

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Outside of German IFO, the morning session looks to be quiet as the market sits and waits for JPow. To fill the time, please find below some further reading that HarksterHQ has consumed this week as they’ve landed in the Fed Channel on Harkster.com  

• WSJ: “How Hard Should the Fed Squeeze to Reach 2% Inflation

• FT: The choices of strategy for Jay Powell

• Saxo: Jackson Hole scenarios

• Macro Hive: Will Jackson Hole Provide Any hints on the Fed?

• FT: Higher for longer rate debate to dominate Jackson Hole meeting

• WSJ: Jackson Hole Might Reveal Potential Divergence Between Central Banks

• BBG: Powell Is Using Jackson Hole as Final Push in Inflation Fight

• Brent Donnelly: Sam Rines on the Mic

• ZeroHedge: Jackson Hole Preview: “Do We Receive Another Hawkish Surprise”

• Raiffeisen: How much potential for surprise this year in Jackson Hole

• BBG: Fed Rate Hikes in 2024 Are ‘Not Unthinkable,’ Pimco Warns

• BusinessNews: US Treasury yield curve shift could be setting up for Jackson Hole unwind

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