PRIMER: Jackson Hole Economic Symposium 2017, 24-26 August 2017

- The theme of the Symposium is ‘Fostering a Dynamic Global Economy’

- Fed Chair Janet Yellen will speak on Friday 25 August at 1500BST (1000EDT), and her speech is said to cover financial stability.

- ECB President Mario Draghi will speak on Friday 25 August at 2000BST/1500EDT and his speech will avoid giving any hints about future policy, according to reports.

NOTE: times are for guidance only based on news reports; the Kansas City Fed will officially confirm the schedule on Thursday at 1800 mountain time.

 

YELLEN SPEECH (25 August 2017, 1500BST/1000EDT):

- Reports suggest that the subject of Fed Chair Janet Yellen’s speech will be on financial stability, therefore, she is unlikely to touch on current policy themes, like inflation and rates. But, the Fed chair may take the opportunity to talk about facets of current policy in the frame of financial stability.

- Balance Sheet Normalisation: Current forward guidance suggests that Balance Sheet Reduction will be appropriate “relatively soon”, and the latest meeting minutes show that “most” on the FOMC are anticipating an announcement in September, with implementation to begin in October. Some expect Yellen to further allude to this in her speech, perhaps by dropping the ‘relatively’ from the “relatively soon” phrase.

- Asset price valuations: The latest FOMC meeting minutes stated that “vulnerabilities associated with asset valuation pressures has nudged up from notable to elevated”. In a speech made in June, Yellen noted that stock asset prices were “somewhat rich if you use some traditional metrics like price earnings ratios”, and that seems to be feeling held by other Fed officials too (like Fed Vice Chair Stanley Fischer, for instance).

- Financial conditions: The minutes also outlined some debate on the FOMC regarding financial conditions, and specifically, the appropriate policy response to easy conditions. One member said easier conditions may require higher rates, while another suggested that elevated asset prices were a market response adjusting to structurally lower rates. “This implies that in the absence of inflation, there may be little need for additional Fed rate hikes to tighten financial conditions,” according to ING, and the bank says that if Yellen is also of this opinion, it would not prompt any major repricing of policy expectations.

- Inflation: The main takeaway from the Fed’s latest meeting minutes was that the Committee is split on inflation. The consensus on the Fed is that softness in inflation is temporary, but some voting members of the FOMC (Robert Kaplan, for instance) have expressed the need for patience to see how inflation plays out before endorsing higher rates. This could possibly result in “policy paralysis”, analysts at Jefferies argue, and “as the group lacks consensus or conviction, the FOMC could again balk when the time comes to actually make a decision to announce balance sheet change”. (NOTE: Yellen isn’t expected to go into too much detail on inflation, given the subject of her speech).

- Debt ceiling: Since March, the US Treasury has been resorting to extraordinary measures to keep the government funded, and as yet, there are no concrete plans for the debt ceiling to be raised before October, when the ceiling will be reached. The Fed may, therefore, refrain from pushing a hawkish narrative until the situation has been resolved, some argue.

 

DRAGHI SPEECH (25 August 2017 at 2000BST/1500EDT):

- Fresh policy steer unlikely: It appears the ECB is trying to play-down President Mario Draghi’s upcoming speech at the Kansas City Fed’s annual Jackson Hole Economic Symposium next week. Citing sources, Reuters reported that Draghi will not be delivering any fresh policy steer, and “expectations that this will be a big monetary policy speech are wrong”. A spokesperson for the central bank said Draghi will stick to the symposium’s theme of ‘fostering a dynamic global recovery’. This is in line with comments Draghi has previously made, where he said he would reveal a new policy stance in the autumn, and some market participants have taken this to mean an announcement will follow at the September or October meeting.

- Draghi has time: ING argues that Draghi’s hand doesn’t need to be forced into revealing new policy. In the past, the central bank has had two ways of communicating policy changes: by either “tasking relevant committees” (as was applied at the beginning of QE, and the end of last year, before launching more QE three months later) and to pledges to “review and re-examine the current monetary policy stance” (used in late 2015 and early 2016 when in the meeting following this guidance, it boosted the size of QE). ING suggests, therefore, that the ECB would still be able to guide the market towards tapering at its September meeting, by potentially using the “tasking” language, before making policy adjustments in December, when the current QE programme is due to conclude.

- Staff projections aren’t completed: Another reason why Draghi may be cautious about hinting at new policy directions at Jackson Hole is that the ECB’s staff macroeconomic projections – to be announced at its September meeting – are unlikely to be completed by the time Draghi speaks. Market participants expect the ECB to trim its inflation forecasts on the back of a higher euro, so the central bank may begin to put more emphasis on its growth forecasts, ING says: “As inflationary pressure is hard to find, the ECB will have to put more emphasis on stronger growth, which consequently requires less monetary stimulus to maintain the same level of monetary accommodation, to justify tapering.”

- Euro strength: The ECB’s latest meeting minutes didn’t provide us with much by way of new information about the ECB’s thinking. However, there were a couple of points to note: the euro exchange rate got a specific mention, with members concerned about an overshoot in the currency. ING also notes that the minutes suggest that the central bank “will indeed be cautious about the way it communicates future policy moves,” after the minutes suggested officials agreed to retain all aspects of its forward guidance to “avoid sending signals that could be prone to over-interpretation and might prove premature”. Some have estimated that the strengthening in the euro since the beginning of the year is equivalent to around 50bps of rate tightening.

22 Aug 2017 - 16:09- Fixed IncomeBank Speaker- Source: RANsquawk

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