After a major rebound, global stock markets are facing the "Jackson Hole Moment"! The market is holding its breath for the final preview of the Fed's interest rate cut

Wall Street investment institutions generally bet that Jerome Powell, the chairman of the Federal Reserve, will fully confirm market expectations at the annual global central bank meeting in Jackson Hole, Wyoming, that the Fed will start this round of interest rate cuts in September. However, as the debate in the market about the Fed's interest rate cuts shifts from "will they choose to cut interest rates" to "how much will they cut interest rates," some stock traders may feel dissatisfied or disappointed with the signals Powell is sending.

For the global stock markets that experienced a so-called "super rebound" last week, the Jackson Hole central bank annual meeting held on Friday night Beijing time will be a "key test," where Fed Chairman Powell and policymakers such as Bank of England Governor Bailey will deliver important speeches. During last Friday's trading session, the options market priced in high volatility of over 1% for the S&P 500 index this Friday, betting that the benchmark index will experience volatility exceeding 1% regardless of whether it rises or falls.

"If traders hear the heavyweight signal that interest rate cuts are imminent, the stock market will react positively," said Eric Bailey, Managing Director of Wealth Management at Steward Partners Global Advisory. "However, if traders and investors do not hear the positive information they want, the stock market, after experiencing a big rebound, may face massive selling."

The upcoming Jackson Hole central bank annual meeting will undoubtedly pose a major challenge to fund managers who have just flocked back to large tech stocks such as NVIDIA, Microsoft, and Apple, as well as those who have been steadfastly chasing the rising S&P 500 index driven by expectations of interest rate cuts and stock buyback programs. Interest rate futures traders are currently pricing in almost 100% certainty that the Fed will begin lowering borrowing costs at its policy meeting in September, pricing in a 25 basis point rate cut.

However, some investment institutions are concerned that Powell may easily remain silent on the timing of interest rate cuts or keep mum on the "timing of interest rate cuts" that the market expects. In previous central bank meetings, Powell often chose to be a "man of mystery," adopting a cautious and non-committal attitude to cautiously reveal how high interest rates might go during the Fed's rate hike cycle, which also fits his character.

"The market is very confident that interest rate cuts are imminent," said Bailey from Steward Partners Global Advisory. "If Powell does not emphasize that this is the path forward, it will be a huge trigger point."

Global stock markets, after experiencing a super rebound, face a crucial test

Powell's "unexpected" comments on interest rate cuts may completely overturn the benchmark stock index of the US stock market - the S&P 500 index, which saw a crazy rebound of up to $3.3 trillion in market value after the most severe sell-off of the year triggered by global stock market panic in early August.

In Asia, the benchmark stock indexes of Japan and South Korea have all recovered all the losses from "Black Monday." European stock markets continued to rise after opening on Friday, setting the largest weekly gain in three months and getting closer to the historical highs they once reached. The MSCI Global Developed Markets Stock Index also posted its best weekly performance since early November last year According to EPFR Global statistics cited by Bank of America, with investors pouring $5.5 billion into the US stock market in the week ending last Wednesday, the bullish forces in the US stock market have regained control, and the benchmark index has risen for seven consecutive trading days.

Since the low point in August, the market capitalization of the S&P 500 index has expanded by over $3 trillion.

However, some Wall Street analysts warn that investors and traders should not expect Federal Reserve Chairman to provide too many explicit rate cut signals, and should not hold overly optimistic views on Powell's remarks.

Tom Hainlin, Chief Investment Strategist at US Bank Wealth Management, said, "Looking back at the speeches from the Jackson Hole Symposium, we are unlikely to get very specific rate cut comments from Powell."

Bill Dudley, former president of the New York Federal Reserve Bank, said that Fed Chairman Powell may suggest that overly tight monetary policy is no longer necessary. However, he expects Powell not to hint at the size and specific timeline of the first rate cut, especially since an important non-farm payroll and unemployment report will be released on September 6, providing policymakers with a more comprehensive assessment before the next policy decision on September 18.

"His tone and the overall tone of his speech are crucial," said Stephanie Lang, Chief Investment Officer at Homrich Berg. "If he surprises the market with an unexpectedly hawkish monetary policy stance, the stock market will react very negatively."

It is clear that traders almost entirely expect the Fed to cut rates at the next meeting. However, traders have not yet fully priced in the size of the rate cut. They generally believe that the labor market report to be released in September is crucial for the size of the rate cut. If the unemployment rate remains high and employment remains weak, the possibility of a 50 basis point rate cut is likely higher than a 25 basis point cut. Whether the Fed's future focus will be more on labor balance rather than fighting inflation will also be the focus of the Jackson Hole Symposium.

The stock market is prepared for increased volatility in the S&P 500 index on Friday

With very few Federal Reserve officials scheduled to speak in the coming days, Powell's speech could bring significant volatility risk to the market. Citigroup Inc. stated that this is why options traders in the US stock market are expecting the S&P 500 index to fluctuate by more than 1% on Friday, regardless of whether it rises or falls, based on the cost of at-the-money put and call options.

As the S&P 500 index has rebounded significantly in recent days, dropping only 2% from its all-time high, Wall Street is almost praying that the pain of this summer is over Data compiled by institutions shows that traders believe the future market will remain calm for a long time, rather than expecting the VIX index to continue to soar. The size of outstanding options contracts betting on a decline in the Chicago Board Options Exchange Volatility Index (VIX) has been hovering at the highest level since June 2022, while the number of contracts betting on an increase is very small.

Of course, some traders have already reduced their bets on a 50 basis point rate cut or more in September, as there have been many signs recently indicating that the U.S. economy is resilient, and a 25 basis point rate cut in September may be the most reasonable. According to Hayne Lin from US Bank, this means that market risks at Jackson Hole are gradually diminishing, and investors are no longer expecting a significant rate cut as they did earlier in August.

"We want to know what the actual interest rate path of the Federal Reserve is, whether they will choose to cut rates at every meeting, or whether they still rely on employment and inflation data," said Hayne Lin from US Bank. "But he may not say that. Traders are more likely to get more detailed information on these issues at the Federal Reserve's September meeting."

Federal Reserve Chair's speech at Jackson Hole usually does not have a significant impact on the stock market unless there is a major shift in monetary policy - like now and in the fresh memory of traders in August 2022. Data compiled by Bloomberg Intelligence shows that since 2000, the S&P 500 index has averaged a 0.4% increase in the week after the meeting.

Historical performance of the S&P 500 index after Jackson Hole meetings - when monetary policy is at a turning point, the U.S. stock market often experiences significant volatility

Looking back at August 2022, Powell's remarks at Jackson Hole can be described as a blow to the value of global risk assets such as stocks. At that time, he warned that the Federal Reserve needed to maintain restrictive monetary policy for a long time to combat inflation rather than quickly lowering interest rates after raising them, which is still fresh in the minds of global traders. On that day, the U.S. stock market plummeted by 3.4%, and in the week following his remarks, U.S. stocks rarely experienced such a sharp decline.

However, this time, market participants hope that the Federal Reserve can achieve the goal of a "soft landing" for the U.S. economy by controlling runaway prices without causing severe economic pain In 2024, there are three more Federal Reserve policy-setting meetings. Traders generally believe that as inflation gradually falls to the 2% target, the Fed may choose to cut interest rates in response to signs of weakening labor. In July, U.S. consumer prices fell noticeably for four consecutive months, while strong retail sales data indicated that the core driver of the U.S. economy - consumer spending - remains very strong, giving officials the opportunity to adopt a less aggressive rate-cutting policy.

"Powell doesn't need to scare the market," said Stephanie Lang, Chief Investment Officer at Homrich Berg. "He needs to make people believe that inflation is receding, and Fed officials are also willing to adjust restrictive rates to a more neutral level."