The crude oil trade remains heavily speculative as traders crowd the long side in anticipation of an agreement between Moscow in Riyadh. This morning, however, prices have turned lower as Iraq is seeking an exemption from the Opec deal citing military spending needs.
Article / 26 August 2016 at 13:48 GMT

Jumpy in Jackson Hole

Managing Partner / Spotlight Group
United Kingdom
  • Markets jumpy ahead of landmark Yellen speech
  • Expect 'a large dose of gradualism' from cautious Fed
  • Short-dated debt, consumer cyclicals could be weaker into the year-end

Jackson Hole, Wyoming
Traders' ears are perked up ahead of Yellen's all-important Jackson Hole speech. Photo: iStock 

By Stephen Pope

The US Dollar index is demonstrating the jumpy, nervous approach that the market has ahead of the speech by Federal Reserve Chair Janet Yellen at 1400 GMT.

It really is a statement that could either deliver nothing new or perhaps several surprises.
Dollar Index

The chart above shows that in just this early phase of trading, the Dollar index has experienced four corrective moves and two impulsive ones. The price action appears to be pivoting around the 94.59 level.

Yellen is certainly not looking to send a seismic shock wave through the dollar or even wider markets by signalling a Fed Funds Rate hike in September. Instead, I would expect this wise lady of economics and central banking to commence preparation work for the market and for a second rise in borrowing costs at the end of the year.

It is a wise step to be ready for the Fed chair to sketch out, in finer than broad-brush terms, the policy tools that the Fed will consider deploying in December as it considers how best to steer the US economy away from the twin dangers of slow growth and abnormally low rates.

Of course, one cannot only expect investors to sit back and digest her delivery with a medium- to long-term perspective in mind. There will be plenty of action across the US Treasury curve (e.g. the 2/10 spread), in S&P 500 futures and on the forex market by the activist investor class. 

For them it is the near-term impact that will carry the greatest weight.

So far, the Treasury two-year is relatively calm at 0.782% – barely changed on the day but six basis points higher than one month ago. The technical sentiment on the two-year is a buy, but I would be hard pressed to see a rally go beyond 0.75%. 

It all depends on the degree of signalling but I can see a flirtation with 1.000% midway into Q1 2017. After all, Yellen is not going to cut rates any further.


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Source: Spotlight Indices

By the same sentiment I sense that the equity sector of consumer cyclicals will be prone to weakening as any impact from rising rates, even if slowly combined with stagnant wage growth, will have at least a short-term impact on consumer confidence and spending.

I think one has to look at the words of wisdom from the assorted talking heads of the Fed. In recent weeks they have drawn the market's attention to the strong labour market and other positive economic signals. The bias is that the Fed are in favour of a rate hike sooner rather than later, although I do not see the trigger being pulled on September 21.

Gently, Janet...

A change in the craft of the message from Janet Yellen is not expected. I say this as the FOMC will not have another take on the labour market until the August jobs report is released in early September.

Yes, I know the labour market was impressive over June and July, but bear in mind that inflation also remains benign, so the Fed can point to this as another excuse to wait. The Yellen style is gradualist and she is not one for "shock and awe" through a major unexpected announcement. 

What Yellen is far more likely to do is offer her own version of forward guidance by establishing the foundation upon which a programme leading toward a normalisation of rates can be anticipated and therefore soundly established.

This is no time to create turbulence. There is still little happening in the current holiday-influenced markets and so there is no need to create a wild Friday gyration that will bring very few (apart from well-positioned speculators) any joy.

What I want to hear is nothing more than a suggestion that the lingering uncertainties around economic growth (which has slowed this year) and inflation (which remains well below the Fed’s 2.0% target) means the Fed need more data.

All Janet needs to do is show the market her trigger finger... just the hint of a move in December is good enough.

Janet Yellen
"So, yeah, I guess it's theoretically possible – how's that?" Photo: Federal Reserve/

— Edited by Michael McKenna

Stephen Pope is managing partner at Spotlight Ideas.


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