Market rebound is very fragile! Will Powell disappoint the bulls?

Market observers generally expect that Federal Reserve Chairman Powell will set the tone for a rate cut in September when he speaks at the Jackson Hole Economic Policy Symposium on Friday.

However, if the speech takes a different direction, the recent rebound in the stock market may be threatened.

Powell is scheduled to speak on the economic outlook on Friday night Beijing time. As usual, the Fed chairman almost always delivers a keynote speech at this highly anticipated annual meeting that attracts senior officials from US and global central banks. The event will take place from August 22 to 24 at the Grand Teton National Park in Wyoming.

While the Jackson Hole meeting is not typically where the Fed chair deliberately guides expectations for upcoming rate decisions, Powell's speech this year will be closely watched.

After all, this year's meeting is taking place after significant market volatility, with traders having adjusted their expectations for the Fed's rate path.

Two days after the conclusion of the Fed's July meeting, a weaker-than-expected July jobs report triggered a sharp decline in the stock market. The next jobs report will be released the day before the Fed's September meeting begins. Economists at BNP Paribas recently pointed out that this situation limits policymakers' ability to influence market expectations.

Looking back, the stock market's average response to the Fed chair's speech at the Jackson Hole meeting has been neutral, but mostly positive.

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

However, there are times when the Fed chair makes remarks that have a significant impact. On August 26, 2022, Powell dashed investors' hopes for a quick end to rate hikes, leading to a 3.4% drop in the S&P 500 Index.

This year, analysts widely expect Powell to pave the way for a rate cut in September. James Knightley, Chief International Economist at ING, believes that Powell is likely to emphasize that inflation is moving in the right direction, giving the Fed more confidence in achieving its 2% target.

Knightley said, "Powell may signal that slowing inflation allows the Fed to focus more on other tasks, namely full employment."

He added, "I guess he will say, given the deterioration in the unemployment rate, we should indeed start cutting rates earlier."

However, Steve Sosnick, Chief Strategist at Interactive Brokers, expressed concerns that investors may have set overly high dovish expectations for Powell's speech Sosnick said, "What if Powell comes out and just says we might want to lower rates a bit, but we don't need a big rate cut?"

This is particularly worrying because according to CME's FedWatch tool, federal funds rate futures traders currently expect the cumulative rate cut by the Fed at the remaining three meetings this year to be close to 100 basis points, implying a significant rate cut.

Sosnick pointed out that Powell might signal that while the Fed may consider further rate cuts when necessary, the Fed will maintain a moderate pace of rate cuts until the data shows a dimmer economic outlook.

Sosnick believes that in any case, Powell's remarks could hinder the stock market from rebounding from the sharp decline earlier this month. With concerns about an economic recession intensifying recently, the stock market is currently in a phase of simply interpreting bad economic news as bad news. Previously, bad news was often seen as good news for the market because it could prompt the Fed to cut rates.

Sosnick said, "I've been advocating caution ahead of the Jackson Hole meeting. Especially the more the market rebounds in advance, the more fragile it may be." The three major U.S. stock indexes all posted their largest weekly gains since late November last year last week.

In addition to Powell's speech at Jackson Hole, investors will also focus on the minutes of the July meeting to be released by the Fed at 2 a.m. Beijing time on Thursday, as well as the weekly initial jobless claims data later that day.

On Wednesday, the U.S. Bureau of Labor Statistics will also release the annual benchmark revision preliminary value for the March employment survey. Naitli pointed out that this data is worth watching because if it is significantly revised downward, it may indicate that the labor market is not as strong as official data suggests.

Naitli said, "The Fed must acknowledge that the labor market is not as strong as official data shows. Similarly, this is also a reason for them to reassess the narrative and decide whether to focus on the necessity of easing monetary policy restrictions."