Market Comment – Dollar powers higher heading into Jackson Hole
August 25, 2023 8:30 am
Traders play defense ahead of Powell’s speech at Jackson Hole
Dollar benefits from risk aversion as stocks reverse lower
Euro extends losses, Lagarde unlikely to offer helping hand
Markets nervous ahead of Powell
A sense of nervousness has returned to global markets. Traders seem to be playing some defense, reducing leverage and trimming their risk exposure ahead of Chairman Powell’s keynote speech at the Jackson Hole economic symposium today at 14:00 GMT. This venue has been used in the past to signal major strategy shifts, so investors see it as an unofficial Fed meeting.
The emphasis will be on what Powell says about the path of interest rates. With US Treasury yields trading near their highest levels of this cycle, his commentary can either add fuel to this rally or trigger a correction, which will have ripple effects on other assets such as the USD, equities, and gold.
Overall, Powell will keep his options open. He preached data dependence last month and he is unlikely to deviate much from that. There has been tremendous progress on the inflation front this year but with core CPI inflation still running at 4.7%, it is way too early for the Fed chief to take a victory lap.
In fact, considering the strength in the US economic data pulse lately, the risk is that he strikes a slightly more hawkish tone, stressing the prospect of a ‘higher for longer’ regime for rates. Or he might put a September rate hike on the table, which markets currently don’t see as realistic, assigning less than 20% probability to it.
Dollar flexes muscles, stocks sell off
If Powell emphasizes the prospect of keeping rates high for longer, that could amplify the upward pressure on US yields and turbocharge the dollar. By the same logic, yield-sensitive assets such as stocks and gold might suffer some losses.
However, this seems to be the consensus view heading into the event, so there is a risk of a “sell the fact” reaction if the Fed chief doesn’t strike as hawkish a tone as many traders expect, eliciting the opposite market effects.
Heading into the event, shares on Wall Street suffered a severe selloff on Thursday, which in turn drove safe-haven flows into the US dollar. The Nasdaq 100 closed lower by 2.2% after trading higher as much as 1.5% during the session. Even for the volatile Nasdaq, this is an enormous intraday range.
Overall, the stock market seems vulnerable here. Valuations are stretched, earnings are stagnant, bond yields have risen sharply, and several retailers have warned lately that the American consumer is pulling back. Even a blowout earnings report from the AI wunderkind that is Nvidia couldn’t keep markets standing. With China and Europe losing steam too, downside risks are accumulating.
Euro and pound get run over
With the US dollar going on a rampage, the euro and sterling are feeling its wrath. Euro/dollar sank below its 200-day moving average this week, torpedoed by the alarming business surveys from the Eurozone and the deterioration in global risk sentiment.
Euro/dollar’s retreat might have further to go. Markets are still pricing in 50-50 odds on the ECB raising rates again in September, which seems overly optimistic given the gloomy data flow and some striking remarks by the ECB’s Centeno yesterday that downside risks have materialized.
The bar for another ECB hike seems extremely high, and if President Lagarde echoes a similar tone when she addresses the Jackson Hole symposium today at 19:00 GMT, there could be a euro-negative repricing in the bond market.
A sense of nervousness has returned to global markets. Traders seem to be playing some defense, reducing leverage and trimming their risk exposure ahead of Chairman Powell’s keynote speech at the Jackson Hole economic symposium today at 14:00 GMT. This venue has been used in the past to signal major strategy shifts, so investors see it as an unofficial Fed meeting.
The emphasis will be on what Powell says about the path of interest rates. With US Treasury yields trading near their highest levels of this cycle, his commentary can either add fuel to this rally or trigger a correction, which will have ripple effects on other assets such as the USD, equities, and gold.
Overall, Powell will keep his options open. He preached data dependence last month and he is unlikely to deviate much from that. There has been tremendous progress on the inflation front this year but with core CPI inflation still running at 4.7%, it is way too early for the Fed chief to take a victory lap.
In fact, considering the strength in the US economic data pulse lately, the risk is that he strikes a slightly more hawkish tone, stressing the prospect of a ‘higher for longer’ regime for rates. Or he might put a September rate hike on the table, which markets currently don’t see as realistic, assigning less than 20% probability to it.
Dollar flexes muscles, stocks sell off
If Powell emphasizes the prospect of keeping rates high for longer, that could amplify the upward pressure on US yields and turbocharge the dollar. By the same logic, yield-sensitive assets such as stocks and gold might suffer some losses.
However, this seems to be the consensus view heading into the event, so there is a risk of a “sell the fact” reaction if the Fed chief doesn’t strike as hawkish a tone as many traders expect, eliciting the opposite market effects.
Heading into the event, shares on Wall Street suffered a severe selloff on Thursday, which in turn drove safe-haven flows into the US dollar. The Nasdaq 100 closed lower by 2.2% after trading higher as much as 1.5% during the session. Even for the volatile Nasdaq, this is an enormous intraday range.
Overall, the stock market seems vulnerable here. Valuations are stretched, earnings are stagnant, bond yields have risen sharply, and several retailers have warned lately that the American consumer is pulling back. Even a blowout earnings report from the AI wunderkind that is Nvidia couldn’t keep markets standing. With China and Europe losing steam too, downside risks are accumulating.
Euro and pound get run over
With the US dollar going on a rampage, the euro and sterling are feeling its wrath. Euro/dollar sank below its 200-day moving average this week, torpedoed by the alarming business surveys from the Eurozone and the deterioration in global risk sentiment.
Euro/dollar’s retreat might have further to go. Markets are still pricing in 50-50 odds on the ECB raising rates again in September, which seems overly optimistic given the gloomy data flow and some striking remarks by the ECB’s Centeno yesterday that downside risks have materialized.
The bar for another ECB hike seems extremely high, and if President Lagarde echoes a similar tone when she addresses the Jackson Hole symposium today at 19:00 GMT, there could be a euro-negative repricing in the bond market.
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