Given the light economic calendar to begin the week, market participants continue to digest the events that transpired during the weekend at the Jackson Hole symposium, trying to decipher how comments from policy makers and academics will alter the trajectory of monetary policy. With representatives from the Bank of England, the European Central Bank, and the Federal Reserve all voicing confidence that the forces dampening inflation would gradually reside and consumer prices would move towards the respective bank’s policy objectives, the initial reaction of financial markets has been one of concern policy tightening may transpire sooner than anticipated given the heightened levels of volatility on the international economic landscape.
The key policy maker in the spotlight was the Federal Reserve’s Vice Chair Stanley Fischer, who sounded slightly more hawkish than recent Fed officials by stating that economic conditions warrant a gradual pace of monetary accommodation removal, but also that the Fed shouldn’t wait until inflation has reached their target of 2% before beginning to tighten due to lag on real economic activity. The basis of the market’s hawkish interpretation into Fischer comments is that while he didn’t tip his hat to when he expected the timing of the first rate hike, the international developments and volatility within the domestic stock market has not completely ruled out a September liftoff. As we surmised at the beginning of last week when financial market’s had taken the rout in commodities and equities as a sign that a September rate increase was off the table, the market’s tendency to swing to extremes would have ample time before the meeting itself to potentially stabilize and push the monetary policy pendulum back to a more neutral probability position.
Ahead of the August payrolls report at the end of the week, we would put the probability of a Fed rate hike below the 50/50 mark, but up from last week’s assessment given the perceived stabilization in equities and commodities. The Fed’s apparent bias towards exhibiting caution before making a decision that could potentially upset the domestic economic landscape leaves us with a greater chance the Fed delays the liftoff for monetary policy tightening, but acknowledge the risk for financial markets is the Fed somewhat surprises and decides to raise rates at the next meeting. The truth of the matter is that the economic situation is a fluid one, and it has been telegraphed by policy makers on the Fed that even they don’t have a good idea of what will transpire at the meeting in a few weeks. Further rehabilitation for the equity market and another solid jobs report could help to rebuild confidence for some of those on the FOMC sitting on the fence, so the focus for financial markets in the early part of September will be if conditions have stabilized enough the Fed is confident about dipping their toes into the water of stimulus removal.
As we get set for the North American open, risk appetite has taken a slight hit on the jitters emerging from Jackson Hole, with S&P futures telegraphing equities will begin the new trading week in the red. The hydrocarbon complex is also seeing a portion of the gains from last week unwound, with front-month WTI edging back below the $45 mark. Currency markets are fairly stable after the dust has settled post-Jackson Hole, though the commodity-linked currencies such as the loonie are under pressure given the slide in oil and the hawkish comments from the Fed’s Vice Chair. The euro is up slightly against the greenback midway through the European session, though relatively close to the unchanged mark when compared to Friday’s close. Despite the perceived lack of volatility in currency markets to begin the week, make sure to confer with your dealing teams and generate a game plan as the week progresses, as the event risk begins to heat up with the ECB monetary policy meeting and dual employment reports from Canada and the US.
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