Jackson Hole Annual Meeting Strikes Tonight, What Messages Will It Bring to the Market?

If the U.S. Treasury and the U.S. stock market were to bet on one thing about Powell's speech at the Jackson Hole symposium on Friday, it would be: he will play it safe. For the Federal Reserve Chairman, this is a critical moment, as he has been trying to navigate through a month where stock market volatility soared to new highs in decades, while bond traders are betting on an imminent rate cut by the Fed.

According to the Wisdom Financial APP, decision-makers and scholars are expected to have a dull meeting at this annual gathering in Wyoming. Strategists from J.P. Morgan and Deutsche Bank expect moderate bond price fluctuations during the meeting, while options traders are betting on minor stock market fluctuations in the coming days, with recent history on their side.

Blake Gwinn, Head of U.S. Rate Strategy at RBC Capital Markets, said: "The Fed is completely satisfied with our current situation. I don't think he will feel the need to create waves here."

With few exceptions, this meeting does not constitute a significant event that affects the market. Data compiled by Bloomberg shows that over the past decade, the average yield fluctuation for 2-year and 10-year Treasury bonds is less than 4 basis points. The S&P 500 index is even more conservative, with an average fluctuation of around 1.3%.

J.P. Morgan strategists wrote on August 16th: "From a traditional perspective, speeches at the Jackson Hole meeting are unlikely to cause significant yield fluctuations." "Considering the importance of the upcoming August non-farm payroll report, the Fed Chairman is unlikely to provide too many details on the extent or pace of easing."

Market shocks are not out of the question. In recent years, the Jackson Hole meeting has been a place where central bank governors signal major policy moves. For example, former ECB President Mario Draghi laid the foundation for quantitative easing at the 2014 conference.

Two years ago, Powell's hawkish speech in Wyoming shocked the market, as he warned investors that fighting inflation would bring "pain" to households and businesses. The S&P 500 index plummeted 3.4% that day, and the 10-year Treasury yield fluctuated by 8 basis points. In the following weeks, as traders raised expectations for more rate hikes, selling continued.

August Impact

Earlier this month, an unexpected rise in the U.S. unemployment rate and arbitrage trading unwinding disrupted the financial markets, leading to bets on emergency rate cuts and pushing Wall Street's fear index VIX to its highest level outside of the global financial crisis and the COVID-19 pandemic. However, these bets were later partially reduced.

Currently, volatility seems to be subsiding. As the Fed Chairman may hint that there is no longer a need for tight monetary policy, options traders are preparing for a rise of about 6 basis points in 10-year futures on Friday. This is in stark contrast to the 19 basis point decline on August 2nd, when a jobs report showed the unemployment rate jumping to its highest level in nearly three years.

Deutsche Bank strategists estimate that the 10-year bond yield will fluctuate by about 5 basis points on the day when analyzing historical data from the annual symposium According to data from Citigroup, in the stock market, based on the cost calculation of put and call options at par, traders expect the S&P 500 index to fall by 0.9%, slightly lower than the 1% a week ago.

Federal Reserve Chairman Jerome Powell's colleagues are increasingly indicating that the time to cut interest rates is approaching. With the next employment report set to be released less than two weeks before the next policy meeting, the interest rate market has fully priced in a 25 basis point rate cut in September, with a roughly 20% chance of a larger 50 basis point cut. For the full year 2024, traders expect the Fed to cut rates by nearly 100 basis points, lower than the nearly 150 basis points earlier this month.

John Queen, portfolio manager at Capital Group, which manages $2.5 trillion in assets, said, "The market pricing is quite fair, the Fed has been very successful in putting the economy on the right path, economic growth is slowing down, but there is no collapse."