What To Expect From Powell's Jackson Hole Speech

Okay, very good morning to you. It's Thursday the 27th of August. I'm just going to kick things off with a heat map of the S&P 500 from the close last night. And as you can see, as you probably already know, US equities just pushing to fresh all-time highs again in regards to the NASDAQ continues to lead the way for the likes of the S&P to follow. Uh, the mega-cap tech stocks once again just dragging that index higher. Facebook up another 8%. So just thinking about the gains that they made the day before as well, so you're talking about a 10% move or so in the space of just 2 sessions. So quite phenomenal really. One of the big standouts of course was Salesforce And obviously we know that there's been a, a tweak as well in the Dow composition that was announced earlier in the week. But Salesforce came out with some earnings and guidance about what they think about the future, and basically they were up 26%, 26% on the session for Salesforce, their ticker CRM. Their earnings beat expectations and they raised their full-year revenue forecast, and that dragged some of the other cloud-related stocks higher. Adobe, Workday, Splunk, these other types of firms as well saw pretty sharp gains on the back of that. But yeah, let's have a look at things and how they reside at the moment. Obviously yesterday as well we had the US durable goods orders that were more than double estimates, and everyone waiting for the next evolution of Fed strategy that's going to, uh, more on a dovish side. So combination of these forces have all been supportive of equity markets. And if we do look at the, the NASDAQ just briefly here, after surging late in the, the US session into beyond the close in the futures, we basically hit 12,000 to the tick pretty much, and then profit taking, we just drifted lower during the Asia session with nothing great deal to speak of really. Um, so such a powerful move though that we've had through the course of yesterday's session. It really did fly. And, you know, looking on a daily continuation, since we've broken away from that kind of key area that was around 11,283, the price has just rocketed up to this new level of 12,000. Similarly with the S&P 500 as well, if we put that on the daily, we're into a period now of consolidation. It's all about wait and see now for for right now ahead of Powell speaking in a few hours' time. But again, on the daily, you know, the extension on the break of that previous high that was seen back in February and around that 3,400 level, price now, you know, 3,500 is now in sight. So it's been an awfully quick move. And the one thing I want to say here then is there's a bit of pressure now. Markets expect, and Powell's got to deliver. I was having a bit of a chat with Alex and some of the other traders on the Advanced Trader Program at the moment. We were talking about what to expect from Jerome Powell today, and yeah, it's kind of— it's going to be interesting. I'd say the biggest trade, of course, is we get a rerun of the FOMC minutes. What if they come out and they're still in deep debate and they've not been able to come to a conclusive end result of what they want to do with this monetary policy review, and therefore there is no average inflation targeting unveiled today. And if that is the case, I think these markets are susceptible to a really aggressive pullback in the equity space if that does materialize. Now, I don't think that that will happen. I think strategically the timing here with the— you've got the Jackson Hole now happening, Powell's speech, and then you've got that as a nice kind of event to prep it up for the mid-September then unveiling officially of these, uh, this just change. So for me, it makes a logical sequence of events. You know, the Fed doesn't like to shock and surprise. It likes to build in these, these things so when policy changes do ultimately occur, the market receives that in a fairly controlled manner. So if they are going to make that September change, they really do need to be— he does need to unveil it really today, so that that didn't come as a shock later on down the line. Also as well, you know, if I think about it as well in terms of what is happening right now, I mean, it just really does instill that kind of fairly bullish mindset at the moment. Sure, there are some ongoing kind of tail risks in the form of the, the US-China trade situation. I can update you with that in a moment. But obviously there's a few things to monitor and you've got the risks surrounding the US election. But even with those things being said, I mean, from the Federal Reserve's perspective, even if we are expecting volatility on the back of the inconclusive US election given the mail-in ballot system, and that's inherently going to create some uncertainty in markets, well, why not try to get ahead of that? And why not implement some of these tools now in order to then safeguard the fact that if there is any uncertainties in the future, then the market is reassured by the fact that you would allow inflation to run over target for a period, uh, and so on. And so I actually think that there's good reason now, um, for, for this to happen. And obviously as well, the Fed are mindful of the fact that they've been guiding us in this kind of direction. Uh, and so from a, uh, coordinated communication point of view, um, they really haven't done a very good job if they are not gonna roll this out today. Because that would be a big disappointment to how I feel markets are primed now positioning-wise for this outcome. So yeah, I guess the payoff if it does come out and he kind of goes down this route that most people are expecting, I guess we might see a little bit more underpinning in equities, but I'd say a lot of it's been priced in, which was yesterday really and before that. And so I'd say The upside is, is fairly limited. The downside, obviously, if he doesn't deliver, is what would be the more interesting trade, because I think that would be much more violent in its price movement. In that case, you would expect not just equities to come down, but T-notes would probably drop quite sharply as yields would spike, the dollar would spike. So both major currency pairs come on some pressure as well. So definitely going to be an interesting one for sure. And one thing just to bear in mind as well, if I just quickly flip over and use them that as a header, is, you know, don't forget to bear in mind that, you know, today's event is such a big deal, the likelihood is it's going to be very quiet now for the next couple of hours. So if you are new to trading, this is really not optimal conditions because a lot of people will be sitting on their hands awaiting this major event, and it doesn't actually happen until 2:10 PM London time. So you're going to have to wait and be patient for the next 6 or 7 hours until that event unfolds. So do keep that in mind. This is the, the big one that everyone's been waiting, and the best of the market moves might be yet to come, not just this afternoon, but depending on what actually happens, could well carry on into Friday's session and into the close of the week. So yeah, a quick look at these headlines. What are people expecting While Bloomberg talking about the likelihood to keep short-term interest rates near zero for 5 years, possibly more, after it adapts and adopts a new strategy for carrying out monetary policy in its recent review of strategy. So the new approach, which could be unveiled, of course, as I said, in, in mid-September, and this is kind of like the preparatory meeting to get that underway. is probably going to involve then policymakers becoming a little bit more relaxed towards their view of inflation, even to the point of welcoming a modest and temporary rise above 2% target to make up for past shortfalls, i.e., known as AIT or average inflation targeting. So this is looking back since when that 2%, um, kind of rule of thumb was adopted more formally, and you can see here that nearly always inflation has resided quite substantially below that target. And so the having a bit more of a looser, more averaging out rather than a definitive fixed figure means that if in the future, whether it be the size and scale of monetary or fiscal stimulus is creating these concerns about future surge of inflation, that later on down the line, well, markets will be somewhat eased in those fears by the fact that the Fed will allow inflation to run over target for a period and not then look to immediately alter and start lifting tightening rates. So, i.e., being a dovish kind of tweak to their policy. The other thing here is about the Fed is also expected to codify a change in its approach toward achieving full employment. So remember, the basic mandate of the Federal Reserve is kind of like a dual mandate. It's about inflation stability and maximum employment. So on the employment side, in the past officials shied away from pushing joblessness below what was considered its long-run neutral rate out of concern that it would lead to too rapid inflation. So, you know, that, that idea then that as the labor force tightens, there's less available pool of people, workers, so people, companies need to compete Therefore wages start to go up. As wages go up, disposable incomes increase, people's ability to spend goes up, and consequently inflation starts to emerge. So again, the Fed being a little bit more flexible on that side of things, as well as then inflation on an averaging it out as a target, is what we're anticipating. Things like yield curve control, um, that's kind of secondary to this. I guess there's a kind of sequence depending on how severe and long-lasting that the, the economic recovery is, the more assured, then the lesser need to be putting in these additional other measures. At the moment, it's all about average inflation targeting as far as today is concerned. So yeah, that, that pretty much is the summary of what we're anticipating. So we're going to be covering this all live at the time, not on the channel here, but for our traders and on Amplify live. So yeah, look forward to delivering that. Elsewhere, looking, looking at the energy markets, oil edges up after traders assessing US Gulf hurricane impact. So everyone's talking about Laura at the moment. Oil's still sitting around a 5-month high for the time being. It is currently a Category 4 hurricane now, so that is particularly aggressive and disruptive, um, at the point of where there is real risk of loss of life given how strong the winds are. It's going to hit the US Gulf Coast early Thursday local time, so in a few hours from now. 84.3% of oil output in the Gulf of Mexico, nearly 3 million barrels of oil a day of refining capacity has been shut now ahead of the storm's landfall. Overnight though, just looking at the map here, Laura did shift a little bit further east and is likely to be significantly, um, is less likely to be significantly disruptive for a refinery and ports in the Houston area. You can see here, this is that Houston port area. You can see that slight, in terms of geography, indentation in the, the land composition. And you can see everyone is situated around there— Galveston Bay, Deer Park, Baytown, Houston, and so on. So actually, Laura has taken a slight turn to the right, which would be alleviating at least some of the worst-case scenario that could have impacted that particular area. So something to just bear in mind. The storm is though also upending flows of oil and products. About 64 crude oil and refined product tankers in the western US Gulf are waiting on Laura to pass, according to ship tracking data. So it'll be interesting next week to see the infantry situation and how impactful this has been. But yeah, first and foremost, anyone within this area, I hope you stay safe and sound. Elsewhere on the US-China trade front, this was an article this morning in Bloomberg that I just quickly and briefly wanted to mention. China increases key purchases with US targets still far off. Um, so what this was talking about is particularly soybeans. China is set to purchase a record amount of soybeans this year, according to people familiar with the matter. They're already placing large orders for soybeans and corn. One of the things that this article on Bloomberg was looking at was that irrespective of the fact that China have been re-accelerating their purchases of certain agricultural energy products that they remain nowhere near reaching their, their pre-agreed Phase 1 target, which of course was for $200 billion in a composition of manufactured, agricultural, and energy goods, as you can see here, broken into these, these three distinct kind of areas. So dominated by manufactured goods. Now at the moment, as of July we're standing, they were currently purchasing at about 28% of target. And this article is a little bit skeptical about how far away that they are from actually achieving this. Now, I think that's a misinterpretation personally. Bloomberg are kind of talking up the negatives of the fact that they're way off meeting the predetermined target. But for me, I think to have expected any type of size purchasing of American goods, imports, through the period of January, February, and particularly March in China, I think is very wishful thinking when they were in the midst of an epidemic at the time with the origination of the outbreak in, in Wuhan. So I think for a starter, they've got a little bit of leeway on that point, and that if they're accelerating now, that's the earliest they could argue that they could have done, having now experienced a period of economic stabilization after what was particularly disruptive, as is what we've witnessed in the Western world during the period— a little bit lagged, of course, until the virus took pandemic status and moved globally— during the period of April and May. So I don't think it's— I think it's a bit of an illusion, the idea that they have to hit 200. I just think that the purchases need to continue to accelerate in a fairly consistent fashion and need to be— there need to be signs that they are willing to continue that pattern. And I think as long as that happens and as long as the farmers can be reassured of that, that will continue, then I think they'll be happy. So I don't actually— I think this is a little bit making a mountain out of a molehill of a story this morning, but I just wanted to talk about it. It does come though with US-China tensions still remaining fairly tense. Yesterday, well, this morning, the US Defense Secretary Esper said that Beijing has repeatedly failed to keep promises to adhere to international laws. And this comes after that situation yesterday where there was reports that China launched two medium-range missiles in the South China Sea, which was touted as a warning to the US. So obviously there's lots of, you know, components, if you like, to this trade deal that go beyond just the purchasing of actual goods. There's lots of kind of proxy events that are happening and perhaps involving other countries as well, if we look at on a global level. For now, I think I don't see any real risks surrounding this, this narrative. It definitely is something that could move the markets for sure, but I think for the time being I don't see it being particularly disruptive with this type of headline. Looking at the calendar for today, obviously everyone's waiting Powell, so I do think you need to bear that in mind. There's not a great deal coming out, if anything major at all. From economic data point of view in UK and Europe. You do have the second reading of US GDP and initial jobless claims coming out the States, both at 1:30. Initial jobless claims has been a little bit erratic. We did see a period of quite sharp improvement only to jump back up above north of 1.1 million last week. So we'll be interested to see where that comes out. And then from a GDP perspective, this is the second reading of that biggest ever one-time collapse that we saw of, of -32.9% for the advanced Q2 reading. The revision is expected to be minimal. And the point being is when I look at this calendar, uh, second reading of GDP, initial jobless claims will have no real definable impact on markets most likely because within less than 1 hour's time you're going to get the main event, which is Jerome Powell speaking at Jackson Hole. And so I think the data really is of little consequence for, for the trading session ahead. Um, but would you want to be in a position? No, for twofold. There is going to be a degree, of course, of fluctuation in price over the release, but also no one's going to be in a position that close to Powell. They'll probably clear the deck. It'll be probably awfully quiet at that point, uh, waiting for the storm to hit, the storm being that of Jerome Powell. Otherwise, speakers, uh, you do have the Bank of Canada governor and also ECB's Lane They're both speaking in the event at Jackson Hole virtually after Powell delivers the opening remarks and again providing a monetary policy framework review. So it is a self-entitled thing. The market is awaiting with high anticipation for that delivery today. Okay, that is pretty much it. So gonna leave it at that. Um, any questions at all, please do let me know. Happy to help. Always just feel free to find me on Twitter, my handle is here, or just drop a comment on the video if you're watching this on YouTube. I will always reply to everyone throughout the day. Okay guys, thanks very much, have a good session, and good luck for Jerome Powell later on today.