What to Expect From Jerome Powell at Jackson Hole

Okay, a very good morning to everyone. I hope you are well. It's Friday, 23rd of August. The day has arrived, the main trading day of the week. Of course, we're looking out for this chap to the side of me. The Fed Chair Jerome Powell is going to be speaking at 3 PM London time this afternoon, so very much the main focus of the session. And as I said, the week as we look to get a little bit more confirmation. Wow, that was a fly that just landed on my head. Yeah.

Geez.

Not sure if that is a sign of good luck or bad luck. I'm not sure. Anyhow. So taking a look at Jay Powell then, obviously the, the reason why this event is so important is because we've had this communication where they've talked about this mid-cycle adjustment, as we know, and that is particularly unusual comparative to the usual interest rate cycles that central banks like the Federal Reserve tend to adopt in more traditional times. And we've had quite a few things that have happened since obviously the last Fed decision a couple of weeks ago now. And since then we've had some updates and, and changes in the trade war situation. We've had the pursuit still of this no-deal Brexit from Boris, although we'll go into that in a second, having met some European counterparts. We've got the G7 happening at the weekend, and then you've had most importantly almost this inversion of the yield curve, which again happened once more yesterday, and whether or not that has changed or influenced the decision-making at the Federal Reserve. And so we await his speech to get more detail as to what does he think, not just about current economic conditions, but also subsequently what is the future monetary policy. Does he lay any more hints, provide more clarity as to what the intentions were with this phrasing about a mid-cycle adjustment? Overall, having just read lots of different types of things, bank research, and just talking to other people in markets, I think the, the coordinated kind of, or the consensus view seems to be that the market could be in for a bit of a disappointment in a sense that Powell likely to just toe the line, not really provide any more kind of substance towards more easing. And given the inherent nature of how dovish the market is priced, then we could be in for a kind of hawkish reaction by default of the fact that the market's so dovishly priced, if that makes sense. So we'll have a look at that in a second. The quick— firstly, a look across the charts, and very much a reflection then of now it's a— it's wait-and-see mode. I would say my suggestion or advice for this morning is to act fairly conservatively. There's probably not going to be a great deal of price movement as people just await then that main event, and it's not happening, the, the text, until 3 PM. And so really, until that point, there's probably not going to be a great deal of opportunity. So just being patient is going to be very important for the morning. Other things that, that are quite interesting, I guess, is, um, well, T-notes and yields have had a pretty choppy week, and I think that is just Evident from, as we're going to discuss in a second, a lot of mixed messages, if anything, coming from the Fed. He had a lot of hawkish commentary yesterday from, from hawks, but certainly has dispelled any notion of a 50 basis point rate cut that's going to happen on the 18th of September. In fact, now that's completely priced out of the market. And then looking elsewhere, gold still holding that $1,500 seems to have consolidated there really this week. I mean, after we had such an explosive kind of end of last month, beginning of August, prices really have started to just be caught in about a $15 price range between the $1,500 handle and about $15, $15.20 on the upside. Equities, yeah, were under pressure obviously in the, in recent weeks, but again have stabilized to some degree. And this morning you're European and US futures are marginally positive. In the currency markets, a little bit of dollar strength overnight. I think that's a bit of follow-through from some of the hawkish comments we had out of the Fed yesterday. So as a byproduct of that strength in the greenback, both major pairs in the top left, EURUSD and Cable, just under a little bit of pressure. Perhaps Cable a little bit more. I think that's more to do with anything, a little bit of profit taking on that a rather accentuated move that we had yesterday where we saw a pretty decent pop at around 1.30. So back below its pivot, and that looks to be just acting as a bit of a near-term resistance point at the moment for what has been trending lower since UK and Europe came into the market. Okay, a few, few things to talk about then, uh, and then Sam will jump on. You can see, as you just did, my chart's relatively clean because Sam's going to come on and put on his technical levels of significance. So a couple of things to be aware of then overall with this delivery from Powell. Firstly, Powell and Carney are there, and I believe RBA's Lowe is also speaking at the weekend. The final day of Jackson Hole is tomorrow, I think. But Draghi and Kuroda have skipped the event, so you're not going to get any more color or detail from the likes of the ECB or the Bank of Japan. Attending or speaking at the Jackson Hole isn't a requirement. It is up to the central banker if they want to use that event. It's run by the Kansas City in Wyoming in US, and that's where the event is hosted every year. So it gives these central bankers, if they feel like they want to communicate more information or be more transparent, a platform to do so. So for the ECB, Bank of Japan, rightly so, I don't think there's any need to kind of put yourself in harm's way for any type of misdirection or interpretation to send to markets. I think the status quo holds for now for those guys. But Powell is obviously the big one, to a lesser extent. We know his hands are kind of tied at this point politically with the situation and uncertainty emanating from Brexit. So with Powell, 3 o'clock. How that will come out, obviously we'll do a much more thorough preview just ahead of the release, but it will be prepared text. And for those who don't know what that means, the accredited news agencies will already have hold of his entire speech. And so when it gets to 3 PM, it's going to be bang, all the comments will drop down the financial newswires. The Squawk will be reading out line, line, line, line, line. So you'll know everything immediately. That does then tend to lead to a large bout of volatility, but you Usually newswires like Bloomberg will pick what they call like a sticky, one of the top main highlighted headlines that they really feel is the standout one isolated comment from that entire speech. So that will normally be the first one that gets called by the squawk and the one which people will jump on and react to. And probably that's going to be around this idea of, again, clarity about any commitment to what their ideas are about further easing in the future. A few things to have a look at then. This is looking at the, the federal funds futures, so the implied probabilities then of a 25 basis point rate cut from the Federal Reserve. And the interesting thing here, comparative to when we were doing the week ahead briefing on Monday, is that a 50 basis point rate cut is now not even visible on this chart. That means then that the, the kind of, uh, checkered one here that says 6.5%, that's where interest rates are right now. So now in fact it's flipped completely, and 6.5% is now being priced in that the Fed will hold rates in September, not even cut them at all, not even 25. So that's quite a distinct shift from where we were just 5 days ago. The overall though baseline expectation still very much so that we're gonna cut rates by 25 at 93.5% probability. If we go out to the end of the year just to get a sense of where we're going to be in a few months' time. So there's 3 more Fed interest rate decisions for this year: September, October, and December. And if you look at what the base case is, is that rates which are currently 2 to 2.25 in the federal funds rate will be cut and twice is what the market's expecting, with a 48.2% probability that will be at 1.5 to 1.75 at that time. So again, this is that idea, and if you start drawing this out to, you know, kind of 12 months out or even further, you can see that rate cuts are really very much bedded in. I mean, if we go out to March of 2020, uh, interest rates as per market pricing is that in the US will be at 1.25% to 1.5%. So you're looking at effectively 100 basis points of cuts if you include the, the one executed already. And so hence the reason why I think the market, as is nearly always the case, is way much more— you know, if the Fed are saying they're doing this, markets are always thinking, well, they're going to do that because markets are nearly always more dovishly priced. And so that does leave them susceptible to then, if the Powell just has a fairly neutral, consistent message, it could be— it could disappoint the doves. If that does happen, that's the type of reaction where you get equity weakness, um, in that sense, dollar strength, uh, and then we play that accordingly. So will that be seen? And we'll find out in a couple of hours. The other thing, of course, as I said, the dollar's a little bit firmer this morning. And the reason why you've had that distinct shift in that actually some participants thinking that rates won't even change in September is this. This is one of them. This is Esther George of the Kansas City Fed. I was saying, I was joking to Sam this morning. You gotta love the press. Whenever they talk about a hawk, they try to find the most meanest, scariest, angry-looking photos of these people to kind of put in this human element of connection that they're a hawk. And then if they get a dove, it's always much more smiley. But yeah, the press is just sometimes unbelievable. But Esther George and Harker, Patrick Harker of the Philadelphia Fed. They were speaking yesterday, and I know you guys caught the comments, but basically they were outlining that it's unlikely that the central bank is going to meet expectations and slash interest rates by roughly the 100 basis points by the end of 2020, as the futures prices, as we looked at, currently indicate. These guys were saying that there's little reason for any additional rate cuts, certainly beyond what's already being done. So the hawks have been out in force to try and realign market expectations. And for me, if I was thinking about a coordinated Fed strategy led by Jerome Powell, um, why would you have let these guys come out and made these comments if you weren't just going to toe the line today? So I do think that if you're looking for dovish surprise from Powell, you will be disappointed, is my point of view. What this has led to then is, uh, again, an inversion of the yield curve in the 2s, 10s in the US. You can see we flirted with that a week and a half ago, bounced significantly really over the last week, and then we've come back down because this idea of without them cutting, does this kind of jeopardize then this idea of a Fed policy error in what they're— this, this, this mid-cycle process that they're embarking upon. And so that's making people a little bit nervous again, and, and the inversions happen once more. Would I read too much into this? Would I take this as a trigger point or a signal to reinitiate some aggressive, um, kind of positioning? No, not really, um, not certainly until I've heard from Powell. Okay, elsewhere, Brexit, what's going on? Well, Angela Merkel is done. Now the French president has also been spoken to. He agreed the two sides should be able to find, quote, something intelligent in 30 days if there is goodwill on all sides, but only if changes did not affect the EU's core demands on Ireland and the European single market. So in a sense, he's saying we're not going to change anything with Northern Ireland. So All in all, my interpretation of what's happened is a couple of things. I think Boris Johnson has actually done a pretty good job. As much as people were very apprehensive given his historical track record of making some absolute blunders along the way as the Foreign Secretary or the London Mayor role, he actually, I think, has handled himself in a fairly professional way, and he hasn't really done too much wrong. I don't think. So the point being, as was our baseline scenario at the beginning of the week though, as much as Merkel has sounded more friendly than Macron— again, that's expected— the end of this week has really not come out with any further progression of this situation. And so the little bit of appreciation we had in the pound yesterday, you know, how much of that can really carry on? Well, I think a lot of that will be determined this weekend at the G7. Obviously we've got the G7 happening in Biarritz in France. This is the schedule, so it kicks off tomorrow, which is very much an opening welcome from the French president. They have an informal dinner in the evening. The main event starts kicking off then on Sunday when they get working lunches and so on. They work through the day on various different different issues. And then on Monday, which is obviously a bank holiday in the UK, that's when they'll give their, their kind of conclusions of their debates in the closing session. So actually, I think it's going to be quite interesting to see what happens when markets reopen, um, in the UK on Tuesday. Certainly if you're looking at the pound then on Monday to have a look what's the response has been to this G7, I actually think we'll be exactly where we were. It will be a similar type of saying, all parties want to avoid the worst case. However, we're not willing to make any concessions just yet, or any changes to the backstop and the demands around Ireland. And so therefore, we remain pretty much at the same point. And that to me is just what you would expect in a normal form of the process of a negotiation. The deadline still too far away, I think, for the relevant movement to happen on either side. So yeah, not expecting too much, to be honest, with the pound movement. All right, that is it from me. Um, again, we'll be on about 20 minutes before Powell. Later I'll come back and give you a full thorough preview for what to expect, and Sam can jump on, look at key levels that we'd be targeting on different types of alternate scenario planning. On whether he is hawkish or dovish or anything in between. Otherwise, have yourself a great long weekend. A reminder, we won't be on, on Monday, but the squawk will be working as per normal on Trading Live. So if I don't speak to you before, wish you a great weekend. Thanks very much.

Yeah, thanks, uh, and, and So I hope everyone has a good bank holiday weekend as well. Should be a decent enough end to the week. You can just see this morning equities just pushing— I'll start with equities anyway— just pushing up to their higher point. And that level area, if you want to call it, in, uh, in the S&P, massively important, just above the R1, yesterday's high, but just as a zone, probably, you know, 5 or so points above that as well has been so key going back to the whole of the month. First really testing that on the, the 2nd, and you can see once multiple times have come back and really just can't break through there where we closed the week. Then it is massively important, uh, can we get above there? And you can imagine there's some stops above that point as well. Whether we could get a clean break before Jackson Hole, I think would be unlikely. Yesterday, after breaking the pivot, which was so key, just been such a good line in the sand this week. We broke through, came back, and again this morning has found really good support. So you've got already just above and below where we're trading your key lines in the sand, your key zones, if you like. 39 to 44, and then that pivot area, 18, 20, 29, 18, and 20. The low of yesterday, uh, also the, the previous low that we had on the 20th, and obviously 2900 just below that as well. So those are for, for now would be the key points that I would be keeping an eye on. Similar zone, if you like, for the DAX. We got up there similar time as the S&P did yesterday, just before the US cash open, and again couldn't quite break through. And it's We had the interns in at the moment, and one of their strategies that I actually, you know, did quite like the look of was to go long DAX only if we close above this level as a whole. So can we get above there? If so, then, you know, you get a faster money move perhaps up towards the high that we had back on the 2nd. So key level, key point to keep an eye on for the DAX. But equities season in general as well. Just as we come through the first half hour of the, the open for the DAX, starting to see a trend just come in. We're getting squeezed up from the low of yesterday, so that's something I would be focusing on going into the rest of the morning. If that was to, to break to the downside, then those higher zones in equities in the US will most likely hold and we drift down as well. For the pound, and I'm just going to drag over euro pound here, I know a few people were talking about the, the pound pairs with the, um, the inverse head and shoulders, or in here the, the head and shoulders. And you can see we broke through that for the euro pound. So obvious level to be focusing on would be that previous neckline to have a retest of that at any point today, not too far away at all. That would be an obvious point people will be looking at. It was such a good level of support before yesterday, helped obviously by the, uh, the comments from, from Merkel again. Um, and I don't see it out of the question that we could get a retest of that today. So again, where we get, um, where we finish the day, the week, will be pretty key, especially going into the weekend. And I expect a bit of movement there, not just for the Euro pound but the pound in general. So drag over here the weekly chart, and you know, these lines are actually drawn on from when we did the, uh, the Q&A on YouTube on Wednesday. Um, I was talking about different scenarios for, for the pound, and we're saying how it's been a bit of no man's land really. And I think that the next big leg down would either have come if we break obviously 120 and close below, but if we can drift back up. So you see this trend line that broke through on the weekly, uh, going back to 2017 here, the break we saw beginning, uh, also the beginning of August, end of July, to speak. I mean, a markup around there, not quite one— yeah, I suppose I was gonna say not quite 124, probably comes in just a bit before that. That's certainly somewhere I would have, uh, of interest. Still a fair while before we could get to that point, you've got to imagine that whole zone would be a place where the, um, the buyers— I mean, the sellers would be attracted to get in again. Quick look elsewhere, we'll have a move over to— let's minimize that— we'll have a quick look over at gold, which you can see this trend line, uh, that has drawn up, and you've got to have it on. It's really getting squeezed from, from both directions here. Now you've got a nice Uh, let me just draw that nice trend line from there. The lows are well respected, just can't get, uh, below that whole 1500 area, uh, on, on the futures. So again, where we finish the week will be key. Can we get a break of this level, this zone that's held so well for the whole month apart from that spike down? But again, we didn't even close the candle below, uh, will be very important if we can get a break above that trend line. And again, we were talking talking with the interns yesterday. Break above there, close above the trend line, and a drift back higher up to the top end of that mini range that we were talking about in yesterday's briefing, which is still held up towards 1518 as well. Quick look over at oil, which drifted lower yesterday, and that trend line which we've had on, which had been choppy on the breakthrough on Wednesday, and again Thursday, kind of acted as a very good resistance point for that move lower. Now, what to expect? Well, I think unless we were to really push higher today— I just put this on this, this 240, and you can have a look at this trend line on as well. The fact that we have broken below this trend here, I think, is quite a bearish, bearish signal for oil. Um, so unless we have a decent enough push higher, and I'm talking back towards really the, the R1 yesterday's high, I think we can start to drift lower again in this market. Just purely technically and from that psychological point that we just, after breaking through, as I mentioned, yes, choppy on, on Wednesday, uh, Thursday, first test strong, second test very strong, and we, you know, since then pushed down quite a bit. So unless we were to really have another go at, you know, getting up here and then closing above, I think you've got to favor overall the downside. And, and oil, while the volume is, is lower, you know, this is one of the nice kind of patterns I like to see just in the morning where you get a nice trend like this— 1, 2, 3— and looking for the continuation of the recent trend of the market over the last couple of days to the downside. So a break of this trend to target really the, the lows of, of the day. Ideally you want the volume to be there, but it's just one to keep an eye on as well for that. Um, have a quick look over just the euro intraday. I know we're not far away from the low of the year, so that's somewhere to focus. Whether we could really get a push down before the back end of the day or not will be interesting, but if they're— the comments are resembling the ones from yesterday. I think we get that low of the year today. And again, can we close below that? That will be pretty key. A failed test like 1.20, a failed test of that would be a bullish signal. If we can close below that August and yearly low in euro today, well, it's not looking too good for next week as well. We sort of broke— trying to break out the bottom end of that range, but you can see again now just a failed test of doing that. I don't think there's anything wrong with just having— sitting on your hands ahead of the afternoon, to be honest. Very quiet morning. The first data point of interest is not until 1:30 with the retail sales for Canada, which we know can go up and down, and nothing can really change as well. Hope, uh, you all have a great bank holiday weekend. Any questions, as usual, please, uh, do let us know, and I'll catch you All next week.