🔝Jackson Hole - can it affect the markets?

🗓Economic symposium in Jackson Hole is, along with the NFP report and Fed decision, a key event of recent weeks - Powell will deliver his speech at 3:00 pm BST on Friday.

The market currently focuses on several factors that are more or less related to each other. The situation could clear up on Friday at 3:00 p.m. BST at the Jackson Hole economic symposium, with Fed chairman Jerome Powell speaking. Investors have long expected Powell to announce the Fed's readiness to begin curtailing its massive QE program at this event. Few weeks ago, the situation in the markets and the data supported such a move. Now, however, it is different. How  the US500 and gold may react?

Jackson Hole

Every year, the markets pump very high expectations ahead of the Jackson Hole economic symposium. This was due to the famous speech of the then Fed chairman Ben Bernanke in 2010 when he announced the second round of the QE program. Usually, the speeches in Jackson Hole coincided with major economic and market developments. However the bankers themselves did not wait too long for Jackson Hole to announce important changes, it was simply a coincidence. It is worth remembering that this is mainly a scientific conference, and the goal of bankers and other representatives is not to shake the markets, but to actually improve the economic and financial situation.

A clear and lasting impact on the markets was actually only seen in 2010. Most of the post-symposium upward movements took place in the years following the previous financial crisis. The rest of the changes were caused by disappointment related to excessive market expectations. Source: Macrobond, XTB

Why tapering could be announced now?

First of all, the majority of the US central bankers are in favour of taking action. High inflation as well as progress made on the jobs market is encouraging Fed members to become more hawkish. The latest NFP report showed an almost 1 million jobs addition and JOLTS above 10 million. Majority of Fed members see the risk of high inflation continuing in the next year. Bankers do not want to keep pumping speculative bubble on the markets.

Bolded Fed members spoke in favour of launching tapering this fall. Composition of FOMC will be more hawkish in 2022. Source: XTB

Why tapering most likely will not be announced now?

According to Jerome Powell and majority of Fed's Board, inflation is temporary and there is still some slack in the jobs market. Some worrisome data from the US economy has also been released recently. University of Michigan consumer sentiment dropped to the lowest levels since 2011. End of pandemic unemployment benefit programmes limited retail sales in the country. On top of that, the next wave of coronavirus pandemic is looming with the United States being the current leader in new Covid-19 cases reported each day. Powell is most likely to use these factors as arguments to keep policy loose for longer and to avoid ending support when the economy may require it.

Does tapering really matter?

Impact of tapering on equity markets is limited. Back in May 2013 when Bernanke hinted at the possibility of reducing QE, yields' rally began, combined with strengthening of the US dollar and drop in gold prices. Stock markets experienced just a minor correction before quickly resuming upward move with another round of QE. Ultimately, tapering did not hamper a long-term bull market on stock exchanges but has significantly impacted gold (as it was a promise of future rate hikes.

Tapering in the past has led only to a minor correction on the stock markets. On the other hand, gold experienced a big jump in volatility. Source: xStation5

Market situation

US500

Equity markets did not experience a major reaction to Bullard's comments on tapering. Covid seems to be more important for stock markets. Nevertheless, indice sits at relatively high levels therefore one cannot rule out some profit taking after Jackson Hole. Defending zone ranging between 50- and 100-session moving averages will be a key task for bulls. Source: xStation5

Gold

The $1,690-1,700 area has been a reversal point for gold recently and it can be reasoned with low volatility on the US yields. It should be noted that US has enormous spending needs that will be financed with debt therefore lower yields are desired. Fed's tapering could exert upward pressure on yields, what is an undesired scenario for the Fed right now. However, inflation concerns may push 10-year yields towards 2% area, what would justify gold price drop towards $1,600 area. On the other hand, stable or even lower yields may push EURUSD towards 1.20 and gold towards $2,000 per ounce. Source: xStation5

What's next?

The next major event to watch for USD and US indices is September's FOMC meeting. Decision will come after August jobs data is released but before September's report, which will be a key sign of jobs market recovery (September that will no longer include pandemic unemployment benefit programmes).