This week, global markets are holding their breath waiting for Powell

The man who dominates the fate of the global market is about to make an appearance again!

From August 22nd to 24th, central bank governors and economists from around the world will gather at the annual Jackson Hole Global Central Bank Symposium. Federal Reserve Chairman Powell will deliver a keynote speech at 10:00 am Eastern Time on August 23rd (10:00 pm Beijing Time on Friday).

The timing of this year's Jackson Hole meeting is quite special. On the one hand, the Federal Reserve is at a crossroads of potentially starting rate cuts, and on the other hand, the global market has just experienced a big rebound after a sharp decline.

Analysts believe that whether last week's rebound can continue depends on whether Powell can provide a clear signal regarding a rate cut in September. The global market is holding its breath, with some strategists urging caution, stating that "the more the market rebounds in advance, the more fragile it may become."

The Higher the Expectations, the Harder the Fall?

After the unexpected cold blast of the July non-farm payroll report, fears of a U.S. recession surged, leading to a "Black Monday" in the global market. Subsequently, with the release of strong consumption data such as retail sales, recession fears quickly receded.

Last week, the global market saw a big rebound, with the S&P 500 breaking a four-week downtrend, rising by 3.9% for the week, marking its strongest performance since November last year. The Nikkei and European stocks rose by 7.9% and 2.4% respectively this week.

Market expectations for a rate cut by the Federal Reserve have been extremely volatile amid the market's sharp ups and downs. Currently, the market expects a rate cut in September, but there is still uncertainty about the magnitude of the cut, requiring a clear signal for further guidance. The next employment report will be released on the day before the start of the quiet period before the September Fed meeting, making the end of August meeting the market's and Powell's only opportunity for "direct communication" before the September decision.

The market is hoping that Powell will set the tone for a rate cut in September during his speech at Jackson Hole.

According to MarketWatch, James Knightley, Chief International Economist at ING, stated that Powell may emphasize that inflation is moving in the right direction, giving the Fed more confidence in achieving its 2% target. Powell may also suggest that slowing inflation allows the central bank to focus more on its other mission, maximizing employment:

"I suspect he will say something like this, given the deterioration in the unemployment rate, we should indeed start cutting rates early."

However, the higher the expectations, the greater the risks. Bloomberg cited Eric Beiley, Managing Director of Steward Partners Global Advisory, as saying, "If traders hear that a rate cut is imminent, the stock market will react positively... If we don't hear what we want, it will trigger massive selling."

Silence is Golden for Powell?

Analysts warn investors not to expect too many clear explanations from the Fed Chairman. Given Powell's character, he is likely to remain tight-lipped about the timing of rate cuts and even less likely to reveal how much rates might fallTom Hainlin, the National Investment Strategist at Bank of America Wealth Management, stated, "Looking back at past speeches by Jackson Hole, we are unlikely to get very directive remarks from Powell."

Former New York Federal Reserve Bank President Dudley said that the Fed Chair may suggest that tightening monetary policy is no longer necessary, but he does not expect Powell to hint at the magnitude of the first rate cut, especially since there will be an employment report on September 6 for central bank officials to consider before the next policy decision on September 18.

Steve Sosnick, Chief Strategist at Interactive Brokers, said, "I called for caution ahead of the Jackson Hole meeting, especially because the more we rebound in advance, the more [the stock market] may become fragile."

From the market's reaction, the stock market's response to the Fed Chair's speech at the Jackson Hole Economic Symposium has historically been subdued and mostly positive.

According to Dow Jones market data, over the past 20 years, the average return of the S&P 500 index during the conference is 0.4%. The index has averaged a 0.1% increase in the month after the conference, and a 1.8% average return in the three months after the conference.

However, there are exceptions. On August 26, 2022, Powell stated in his speech that the Fed needs to maintain monetary policy constraints to combat inflation, shattering investors' hopes for a quick end to Fed rate hikes. On that day, the S&P 500 index plummeted by 3.4%.

Current options trading market pricing indicates that on the day of Powell's speech, the S&P 500 index is expected to fluctuate in either direction by more than 1%.