Markets to Watch This Week: Jackson Hole to Confirm Fed Remain Hawkish

We standardise WoW price changes across different markets to allow for cross-market comparisons.

Market Moves

Hawkish rhetoric returned to markets in force last week as more Federal Reserve (Fed) voters pushed for more hawkish market pricing. Notably, Tom Barkin, President of the Fed Bank of Richmond, said the central bank will ‘do what it takes’, even if that means recession. As a result, USD had its strongest week since April 2020 with risk-on currencies taking the biggest hit across G10 (Chart 3). US front-end rates, however, were not spurred higher; the interpolated US 2Y ended the week where it started (~3.25%). A larger move was seen in the US 5Y, Dominique reads this as a sign that the market does not think the Fed is doing enough. Overall, the notion of weaker risk appetite was felt across other markets too (Chart 1).

Across the Atlantic, European yields continued their impressive climb, with moves being most aggressive in the UK (2Y: +47bps WoW; 10Y: 30bps WoW). Higher than expected inflation readings (UK CPI: +10.1% YoY vs 9.8% YoY exp.; Ger PPI: 37.2% YoY vs 31.8% YoY exp) contributed to the move. Inflation outlook remains bleak, but so does growth. The gas crisis remains headline news as, over the weekend, Gazprom announced that flows along Nord Stream will halt for maintenance for three days (31 August – 2 September). As we have previously warned, there is more downside than upside to supply. Once complete, flows are expected to return to 20% of capacity, which would be unchanged from current levels.

The Week Ahead

Focus, this week in the US, will turn to the Jackson Hole conference. Dominique expects Fed Chair Jerome Powell to remain hawkish and focus on three themes:

1. Returning inflation back to target is more of a concern than employment.
2. The June SEP Federal Fund Rate trajectory still applies. As a result, Powell will push back against rate cuts in 2023 – 30bps of cuts are currently priced into 2023.
3. The risk of a hard landing is increasing, though he will not get into too many details there.

Data will also be important with personal income and consumption (Friday) the most important data to watch. Markets are expecting personal income (+0.6% MoM) to have increased faster than consumption (+0.3% MoM) through July. This implies an increased savings rate. Dominique, however, points out that strong retail numbers suggest that consumers have been spending rather than saving, which implies that the savings rate has fallen, all else equal. This points to the risk of an upward surprise in personal consumption.

In Europe, positives will be hard to find this week. First, on Friday, the UK’s Ofgem will provide its update for the price cap (the electricity and gas pricing which determines a large proportion of UK household energy bills) for October. The rise is expected to be substantial – estimated above 80% – which markets will likely use to price a great risk of overshoot in Q4 inflation, and with it more Bank of England hawkishness. Second, across the Continent, preliminary PMIs (Tuesday) could provide further evidence that the deteriorating economic outlook is extending further into the business sector. Third, for the Eurozone, Henry expects Panetta (Tuesday), one of the more dovish ECB policymakers, and the latest ECB minutes (Thursday), to indicate the increased focus on near-term inflation overshoots. The more hawkish pivot would reinforce Henry’s expectations for another 50bp hike from the ECB come September.

For further analysis, see our week-ahead preview, and watch Andrew and Dominique discuss the upcoming Jackson Hole conference, and the road ahead for the Fed.