Jackson Hole Preview: Market Reactions, And Why UBS Says “Don't Skip Lunch”
Historically the annual Jackson Hole symposium has been a major market-moving event as it has traditionally been the venue where central banks make critical announcements such as Bernanke’s preview and hints of QE2 and QE3 in 2012, as well as Draghi’s suggestion of the ECB’s QE in 2014. As shown in the chart below, market reactions following these events have been material.
This year, however, while there was a sharp build-up in expectations after several media trial balloons suggested that Draghi would unveil the ECB’s taper, the fact that the market sent the EUR just shy of 1.20 in frontrunning of this announcement, prompted the ECB head to abort the entire affair, “leaking” that no material announcement would be made this week in Wyoming after all. Which is why, in previewing potential market moves, Barclays says that “the risk for the EUR around the event is biased to the downside, and that EUR bulls might be disappointed by a lack of meaningful hints on ECB monetary policy normalisation.”
ING is quick to take the fun out of this week’s annual meeting: “this year’s major speakers, Fed Chair Janet Yellen and the ECB President Mario Draghi, are likely to keep their cards close to their chest. Both speeches are likely to be fairly “high level” and lack any major hints about future policy.“
As Deutsche Bank’s Jim Reid echoes, “there might be a few less nerves about the next few days in markets than many felt a few weeks ago. Back then, Thursday’s commencement of the annual Jackson Hole Symposium seemed to be a natural place for Mr Draghi to signal that exit from QE was soon to be accelerated. However a combination of still soft global inflation data and the Euro’s recent ascent has made it unlikely that the event will be a watershed moment. Expect him to be upbeat on the economy but the hawkish/dovishness indicator might be swayed one way or the other on how much attention the Euro gets in his remarks.”
What about the Fed side of things? Here, according to UBS there will be nothing of market-moving either, and as the bank’s economist Seth Carpenter writes “Don’t expect news at Jackson Hole. Chair Yellen has told us what she wants to about normalization, for now. Financial stability matters, but it isn’t new” and as such it will be “nothing to skip lunch over.” Carpenter elaborates that “the annual Jackson Hole Symposium features Chair Yellen on Friday speaking on “Financial Stability.” The conference has in recent years been a venue for big news in monetary policy, but this time around it is likely to be undramatic. We expect the Chair’s speech to keep to well-trod financial stability topics—some excesses may exist, but the system is safe—and eschew discussion of potential near-term policy actions.”
Deutsche Bank is a little less sanguine:
Our Fixed Income Strategists now actually think that the Fed could be more important at Jackson Hole. The running theme of this year’s symposium is “Fostering a Dynamic Global Economy” and the full line up of speakers and presentations will be released at 4PM EST on Thursday. Mrs Yellen will be speaking Friday morning at 10AM EST on financial stability. Our strategists noted that in the US there is a tension between softer inflation and easy financial conditions and given the topic of Yellen’s speech is ‘financial stability’ she may lean towards prioritising one side or the other. Overall the market will probably be most sensitive as to whether a December hike is more or less likely after her comments. The imminent halting of reinvestment seems to be considered a fine deal.”
But why is UBS convinced that Friday’s events (a full logisitcal breakdown is below) will be a snooze fest? Here is the explanation”
The FOMC has told us what they want us to know on monetary policy
The FOMC has increased its communication and transparency about the normalization of its balance sheet. The big news is out. The outlook for rate hikes, Chair Yellen and the FOMC have told us, depends on the realized and expected path of inflation. Some technical details about implementation remain to be disclosed, but Jackson Hole would not be the venue. The FOMC has also been clear that they will put off decisions on the terminal size of the balance sheet until after implementation has begun.
“Financial stability” matters, but isn’t new
As we noted, the Minutes of the June and the July meetings both discussed financial stability issues. In July, “a number” of participants noted that very low long-term yields could snap back abruptly or induce excessive risk taking. Moreover, the FOMC discussed equity valuation as a possible source of financial instability along with commercial real estate. On net, however, the FOMC seems comfortable with current financial stability risks, even though they will continue to monitor developments.
So what will she say about financial stability?
We suspect that Chair Yellen will take this opportunity to discuss the distinction between financial stability considerations and financial conditions more broadly. She will take stock of the signal from historically low interest rates and the forces that determine those rates. These factors include slower potential GDP growth than historically was the case, global savings demand for very safe assets, and the Fed’s balance sheet that continues to put some downward pressure on rates. She will note that equity valuations are high by some metrics, but by others may be justified. She will spend time on tight credit spreads, especially in the context of the Fed’s monetary policy, the ongoing expansion, and generalized risk taking. Finally, she will acknowledge that parts of the Committee see commercial real estate as potentially pointing to excessive risk taking.
Well, what about financial conditions?
The Chair will take some time to differentiate financial conditions from financial stability concerns. The high level of equity prices, tight credit spreads, and low longer-term Treasury yields are much in discussion. She will note that the easy financial conditions are not, in and of themselves, a problem for monetary policy. Rather, they are one factor among many that inform her outlook for the economy. Easier financial conditions should, all else equal, support aggregate demand. In fact, as noted in Fedspeak, the Committee’s outlook for ongoing gains and higher inflation over time is supported by these conditions, not hampered by them.
What should we take away?
Very little. Overall, Chair Yellen’s speech will articulate more clearly how the FOMC thinks about financial stability issues, there should be very little that informs us on the near-term outlook for monetary policy. She will likely reiterate that the post-Crisis regulation has made the system safer. She will embrace the idea that there is room for some adjustment to the existing regulation, but she will push back against the idea of wholesale financial deregulation.
Of course, if UBS is right, any hopes of a spike in cross-asset volatility at the end of the week can be postponed yet again. Market outcomes aside, what is the agenda and logistics? Here, courtesy of Goldman, is a full breakdown:
Starting with the basics, the conference runs from the night of Thursday, August 24 through Saturday afternoon. Each year, the conference centers around one broad theme (this year it is “Fostering a Dynamic Global Economy”) and all of the presentations should be a mix of current policy discussions and the conference theme.
The full program will be released here on Thursday night at 8pm NY time. In addition to timing, this schedule will include speaker names and the title of papers they will be discussing (if applicable). It is probably worth mentioning that because the conference is in Wyoming, all times are listed in Mountain Time. That is two hours behind the US East Coast and seven hours behind London.
None of the conference is broadcast. For all of the published speeches and papers, text will be released at the scheduled time for the panel or speech and there is no televised Q+A. However, there are usually a series of sideline TV interviews across major business networks. These are conducted throughout the day with a number of Federal Reserve officials (usually around five), international central bankers and academics. Because the speeches often have more of an academic slant, these interviews can often be the most relevant short-term news events of the day. The last couple years, Vice Chair Fischer has done an interview on CNBC during the first coffee break around 11:30 NY time.
The main events start Friday morning at 10am with the keynote speech, which we now know will be delivered by Fed Chair Yellen. So far, the Fed has only said that her speech will be on the subject of “Financial Stability.” It is obviously hard to forecast a freeform speech, so we will just make a few logistical points.
- First, since it is the keynote speech for the conference, the content of the speech should be closely tied to the conference theme of Fostering a Dynamic Global Economy.
- Second, the subject of the speech alone is not a sufficient indicator for whether or not she will comment on current policy. Last year, the subject of Yellen’s speech was listed as “The Federal Reserve’s Monetary Policy Toolkit” but she decided to include an opening section on the “Current Economic Situation and Outlook” that could just as well have been omitted.
- Third, keep in mind that this is an academic setting above all else. Although Yellen certainly knows the weight that her words carry, the Jackson Hole keynote tends to be 10-15 pages long and can include multiple pages of academic references and footnotes; this is not the kind of thing that is easily distilled into a few news headlines. Last year’s speech, with its explicit section on current policy, was probably an exception to that rule.
The keynote speech is just one aspect – albeit an important one – of a busy conference.
So far, we also know that ECB President Draghi will deliver the luncheon address on Friday at 3pm NY time. The text of his speech should be released at that time. While this could certainly change, the rest of the speaking slots on Friday are usually reserved for academics. In past years, there has also been a closing panel on Saturday around 12:25 NY time that features speeches from two or three G10 central bankers and one from EM.
On the other end of the spectrum, the academic papers (and the topic of the conference itself) could potentially have the longest-lasting impact on the policy discussion. However, these will also be the hardest to immediately interpret. As with the speeches, the text of the academic papers will not be released until the time of the relevant panel. The title and author names will be on the program released on Thursday night.
As Goldman further adds, given the number of Federal Reserve comments likely to come out of Jackson Hole on Friday, the bank is providing its usual table of recent Fed comments with a bit of a longer history as a quick reference point. For example, Dallas Fed President Kaplan’s comment last week that he is going to be “patient” on future rate hikes was a repeat of comments he made in July.
* * *
Finally, for those who are not convinced that Draghi, who is scheduled to speak on Friday just before the market close, won’t steal the spotlight after all, Deutsche Bank reminds us that the ECB head is warming up for the trip by speaking at the Lindau economics symposium in Germany tomorrow, August 23 “and as such he could front run himself.” In other words, tomorrow’s conference could be more market-moving than what happens on Friday.