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The Global Markets Weekly – 8/17/18
Powell to Stay the Course at Jackson Hole?
The Kansas City Fed’s annual economic symposium in Jackson Hole, Wyoming is the traditional end-of-summer hangout for policymakers. This year’s topic is “Changing Market Structure and Implications for Monetary Policy”. Market structure is defined by varied levels of competition between firms, from “perfect” to “monopoly”, and also the relationship between suppliers and buyers of labor. The impact of technology and disruption has been to DE an important driver behind lower than expected inflation in recent years. On the latter, transparency and the rise of the “gig economy” is changing individuals’ relationship with their employers.
While investors are right to focus on the high profits and productivity of the best-performing large-cap names included in major indexes, central bankers are tasked with the broader economy, where low productivity and high income and wealth inequality are felt far more broadly.
Fed Chair Powell will speak at the event on Friday, and will be important to watch in terms of validating market expectations for a Fed hike in September. Comments about potential contagion from Turkey or tariff spats could make headlines, but market pricing—barring spreading contagion—sees little chance the Fed skips September, with December still a modestly better than even bet. Jackson Hole has proved to be an important venue for policy changes, having been used by Fed chairman Yellen and Bernanke to announce changes in policy. We would also monitor any rumors about an endpoint to balance sheet runoff sooner rather than later.
If contagion spreads, the FOMC could decide the better form of valor is to keep to one more move this year, not two. The combination of higher rates and a strong dollar has made life difficult for countries like Turkey which issue large amounts of dollar denominated debt. With domestic core inflation rising but still below 2 ¼% and wage inflation stable, the Fed could justify being cautious. Markets see a turn toward a slower pace of rate hikes after 2018, with a third move (after two this year) not well-priced until the second half of 2019, and less than two moves for 2019. From the strict standpoint of growth and inflation pressures that DE believes will remain more robust than many expect, that appears too slow, but there will be more to consider ahead.
Coming Week’s Key Indicators and Events
|Release||DE / Consensus||Comment|
|U.S.||J. Hole Conf (Th-Sa)
Fed Minutes (We)
Powell Speech (Fr)
|Historically a place where policy signals have emerged, but economy in the here and now favors measured tightening.|
|Euro||Aug Man PMI (Th)
Aug Svcs PMI (Th)
|-0.2 to 54.9/unch||Bottoming or more slide? GDP was a bit firmer than first thought in the second quarter, but price inflation still very soft.|
|Japan||Jun All Ind Act (Th)
Jul CPI (Fr)
Ex fresh food
Ex food & energy
|-0.8%/ -0.8% m/m
1.0% / 1.0% y/y
0.8% / 0.9% y/y
0.3% / 0.3% y/y
Base effects firmer in coming months, prices ex food and energy still very soft, BOJ reduced its outlook for prices at its last meeting.