Despite weeks of anticipation, investors have lowered their expectations for Friday’s Jackson Hole event, saying that U.S. Federal Reserve Chair Jerome Powell has little reason to rock the boat.
Some market-watchers had seen the conference as a potentially key moment when Powell could give hints about tapering the Fed’s $120 billion in monthly asset purchases that have propped up the market after COVID-19 hit.
However, with a consensus still forming among Fed members on when to taper, some see scant market-moving revelations by Powell in his speech, contending the Fed will want to see upcoming jobs and inflation data and more information on how the coronavirus Delta variant impacts the economy.
“It does feel like the markets and investors are basically going into this event with more of a neutral stance and not taking any big bets one way or another,” said Anders Persson, Nuveen’s chief investment officer.
Amid many characterizations of the conference as a potential “yawner,” U.S. stock indexes have hit record highs and derivatives markets are shrugging it off, although bond markets have been a bit more volatile.
Meanwhile, tapering views may be evolving due to the Delta variant with Dallas Federal Reserve President Robert Kaplan saying last week he may need to adjust his call for reducing asset purchases this fall.
Even when tapering does start, some say the Fed is unlikely to generate a “taper tantrum” similar to 2013 when Fed chief Ben Bernanke told lawmakers the central bank could slow its pace of asset purchases, sending yields sharply higher.
Goldman Sachs in a research note estimates the magnitude of moves versus 2013 “is likely to be smaller” given how well-telegraphed the policy change is likely to be.
Powell in July edged closer to unveiling plans to taper, going so far as to describe the Fed’s July gathering as the “talking-about talking-about meeting.”
“We were always in the nothing-burger camp and at this point we think that … the Fed has talked about tapering for quite some time and so if you aren’t expecting it you live under a rock,” said Jack Janasiewicz, portfolio manager at Natixis Investment Managers Solutions.
At a time when gyrations in the foreign exchange market are particularly muted – the Deutsche Bank FX Volatility Index (.DBCVIX) is near historical lows – traders do not see Powell shattering the calm.
“Currency markets are overwhelmingly positioned for a snoozer,” said Karl Schamotta, chief market strategist at Cambridge Global Payments in Toronto.
Activity in the U.S. equity options market is similarly nonchalant, with traders largely looking past the Jackson Hole event, Susquehanna International Group’s Chris Murphy said in a note.
S&P 500 options are currently pricing in a one-day move of about 0.6% on Friday, according to Matt Amberson of analytics firm ORATS, about the same as the 0.63% move the S&P 500 has logged on average on the day the Jackson Hole symposium heard from the Fed chief.
In the bond market, the ICE BofA MOVE Index (.MOVE), which tracks traders’ expectations of swings in the Treasury market, was just a little higher than its 5-year average. Yields moved higher on Wednesday, although that was partly ascribed to low liquidity.
Jason England, a global bonds portfolio manager at Janus Henderson Investors, sees thinly traded Treasuries remaining range-bound.
“Until you get some more of that data and get closer to any firm views on tapering from the consensus on the (Federal Open Market Committee), you’re not going see much shocks in Treasuries,” he said.
Still, there remains some caution.
Tim Murray, a capital market strategist at T. Rowe Price, said his positioning of being slightly underweight in equities reflects concerns over elevated valuations in most asset classes, slowing growth and waning stimulus.
“Within equities, we are tilted towards value … if there’s a negative surprise and rates do go down you’ll want to have fixed income in that case so we benefit from a slight overweight there,” he said.
Charlie McElligott, a cross-asset strategist at Nomura, cautioned in a note on Wednesday that the Fed event also coincides with a large-scale expiration of Treasury options on Friday, indicating the potential for heightened moves in the Treasuries market.
“Powell will have to say something at Jackson Hole,” said Thomas Costerg, senior economist at Pictet Wealth Management. “We have heard the views of regional Fed governors and people want to hear what Powell thinks.”