Jackson Hole’s history indicates that Powell avoided market shocks

(Bloomberg) — If the U.S. Treasury and stock markets are betting on one thing from Jerome Powell at the Jackson Hole symposium on Friday, it’s this: He’ll play it safe.

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It’s a critical time for the Federal Reserve chairman as he tries to navigate a month in which a gauge of stock volatility briefly rose to a generational high and bond traders bet the U.S. central bank is on the verge of to reduce interest. rates.

By some measures, the annual gathering of Wyoming policymakers and academics is expected to be uneventful. Strategies from JPMorgan Chase & Co. ( JPM ) and Deutsche Bank AG ( DB ) expect moderate moves for bonds during the conference call, while options traders are betting on small swings for stocks in the coming days. Recent history is on their side.

“The Fed is perfect where we are right now,” said Blake Gwinn, head of US interest rate strategy at RBC Capital Markets. “I don’t think he’ll feel the need to really make a splash here.”

With a few exceptions, the rally was not a major market moving event. Over the past decade, yields on two- and 10-year notes have moved less than 4 basis points on average, data compiled by Bloomberg show. The S&P 500 (^SPX) was more reactionary, averaging around 1.3%.

“Jackson Hole speeches have not traditionally led to big yield moves,” JPMorgan strategists wrote on Aug. 16. “The president is unlikely to provide much detail on the extent or pace of easing, given the importance of the upcoming jobs report in August. “

A concussion is not out of the question. The Jackson Hole confab has been where central bankers have sometimes signaled major policy initiatives in recent years. Former European Central Bank president Mario Draghi, for example, laid the groundwork for quantitative easing at the 2014 convention.

Two years ago, Powell surprised the market with a thunderous speech in Wyoming, warning investors that the fight against inflation would bring “pain” to households and businesses. The S&P 500 fell 3.4% on the day, while 10-year yields (10Y=F) saw an intraday swing of 8 basis points. The sell-off continued in the coming weeks as traders fueled expectations for more rate hikes.

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August shock

Earlier this month, a surprise rise in unemployment and the unwinding of the carry trade rattled financial markets, prompting bets on emergency rate cuts and sending Wall Street’s gauge of fear, the VIX, to its highest level outside the global financial crisis and the Covid pandemic. . These bets have since been reduced.

For now, volatility appears to be fading. With the Fed chairman likely to suggest tight monetary policy is no longer warranted, options traders are positioning for a move of about 6 basis points in 10-year futures on Friday. That pales in comparison to the 19-basis-point returns on Aug. 2, when a jobs report showed the jobless rate rose to the highest in nearly three years.

Deutsche Bank strategists looking at historical data on the annual symposium estimated that 10-year yields would move about 5 basis points in either direction on the day.

For stocks, traders are bracing for a 0.9% move in the S&P 500 (^GSPC), based on the cost of at-the-money puts and calls, according to Citigroup Inc. (C) This is down slightly from over 1% a week ago.

Powell’s colleagues at the Fed are increasingly talking that the time to start cutting rates is nigh. With the next payrolls report less than two weeks before the policy meeting, the rates market has all but locked in a quarter-point cut in September, with about a 20% chance of a jumbo half-point move. For the full year 2024, traders are betting on nearly 100 basis points of easing, down from nearly 150 basis points earlier this month.

“The market prices are pretty fair,” said John Queen, a portfolio manager at Capital Group, which oversees $2.5 trillion in assets. “The Fed has been pretty successful in getting the economy on the right track where growth is slowing but not falling apart.”

— With assistance from Jessica Menton and Farah Elbahrawy.

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