All eyes on Fed at Jackson Hole

(Danske Research Team – Danske Bank A/S)

Market movers today

The market will be eagerly awaiting Fed chair Jerome Powell’s speech at 16.00 CET, where he is expected to lay out the path for monetary policy amid still significant inflation pressures but an US economy that is witnessing a significant growth slowdown.

The personal consumption expenditure report is also due in the US, which will reveal the Fed’s favoured inflation measure, the core PCE core deflator. The consensus is for an easing in both the core and headline inflation.

The 60 second overview

Markets have seen renewed focus on stagflation: Over the last 1-2 weeks, markets have seen an increased focus on the risk of very weak growth coupled with high inflation. In fixed income, interest rates have gone up again (e.g. the US 10yr yield is back at 3%). In equities, we have seen a shift towards the energy sector and defensiveness as found in high-dividend paying companies and equally, in FX; we have seen a substantial strengthening of the dollar as US benefits relatively over Europe through the terms-of-trade. While the natural gas surge in the past two weeks has reignited inflation fears in markets, the weakening growth outlook is also visible on the back of this shock. This week, it seems like markets are waiting for the next step as regards policy intervention and focus is thus with the Fed meeting at Jackson Hole.

This morning we published our new recession monitor where we track how close a recession is, in notably the US and euro area economies, using various indicators for production, income, labour markets and financial markets, which are typically good leading recession indicators. Our recession model indicators for the US and Eurozone show that a recession is certainly nearing, especially in the euro area, but the labour markets and investment cycles are still holding up relatively well on both sides of the Atlantic giving some cushion for the time being, see Recession monitor – Closing in, 26 August.

Equities: What started as wait-and-see mode ended in outright rally in the final hours of trading. We see positioning as the major reason behind these moves on top of dovish Fed speech, lower oil price and Chinese stimulus. Cyclicals the name of the game with tech and banks among the better groups. S&P500 1.4%, Nasdaq 1.7%, Dow 1% and Russell 2000 1.5%.

FI: Yesterday markets reverted some of the recent sell-off, amid Bunds rallied 4bp to 1.31%. While the natural gas surge in the past two weeks has reignited inflation fears in markets, the weakening growth outlook is also visible on the back of this exogenous shock. This constantly changing narrative of market drivers is keeping volatility elevated. Front end flattened notably yesterday, yet there are 190bp priced until the peak in ECB hikes, we find it difficult for ECB to validate market pricing.

FX: With real rates dropping and risk rallying heading into Jackson Hole the notoriously risk-sensitive ZAR, AUD and NZD had a strong Thursday session. EUR/USD trades just below parity while both EUR/NOK and EUR/SEK have edged a few figures lower. EUR/GBP continues to hover just north of 0.84 while EUR/CHF so far has failed to sustainably break through 0.96.

Credit: Credit markets saw another day of slight tightening with main being 2.3bp tighter to 107.2bp. iTraxx Xover tightened 12.3bp to 530.5bp. We also saw decent activity in the secondary cash market. The primary Nordic market remains open with several prints including a subordinated high yield bond from NKT A/S issued at a coupon of 7.24%.

Nordic macro

In Sweden, we get PPI and the labour force survey for July from Statistics Sweden at 8.00 CET. The seasonally adjusted unemployment rate is expected to remain around 7.7%. There are so far no signs of a weaker labour market with companies reporting of high labour shortages and households, despite being historically pessimistic in general, are not too concerned about losing their job according to the NIER survey.

Read EURUSD Forecast: Euro defines key levels for the next breakout

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