Where to Next for the Fed?

SUMMARY & TALKING POINTS

• Fed policy makers continue to grapple with inflation/labor dynamics.
• Rates markets eye May/June for first rate cut.
• Extreme levels present on USD & S&P 500.

CENTRAL BANK FUNDAMENTAL BACKDROP

The Jackson Hole Economic Symposium for 2023 will run from the 24 – 26 August (see economic calendar below) and although other central bank and economic leaders will be present, Fed Chair Jerome Powell’s address is the one to watch. The theme for this year is titled ‘Structural Shifts in the Global Economy’; a pertinent topic as banks look to move away from a high interest rate environment as many major economies begin to slow.

Leading up to the symposium, the US economy has shown signs of moderating inflation but remains far off the Fed’s 2% target level. The robust labor market has yet to show signs of significant weakness and has led to the present ‘higher for longer’ narrative.

VIEW MY RISK EVENT FOR THE WEEK: USD ON JACKSON HOLE SYMPOSIUM

US ECONOMIC CALENDAR (GMT +02:00)

Source: DailyFX economic calendar

Looking at implied Fed funds futures below, money markets are pricing in a rate cut around May/June 2024 after being pushed forward from September 2023 just a few months ago.

IMPLIED FED FUNDS FUTURES

Source: Refinitiv

The US 10-year Treasury yield below has been in focus this week as yields reached 16-year highs. The bond market is positioned for sustained tight monetary policy conditions and any major change from Jerome Powell will surprise markets.

US 10-YEAR TREASURY YIELD

Chart prepared by Warren Venketas, TradingView

JACKSON HOLE 2022

Last years symposium saw Fed Chair Powell emphasizing the need to tackle inflation with reference to simultaneous moderation in the labor market as well as a reduction in growth. Many of this has played out as expected but the call for rates below 4% through 2023 is clearly far from current rates alongside a resilient employment backdrop.

WHAT TO EXPECT AT JACKSON HOLE 2023?

With the US economy showing unexpected resilience (particularly via the labor market), it is difficult to see Fed Chair Jerome Powell reorientating the current rhetoric to one of a more accommodative stance considering recent US economic data. Inflation will almost certainly be a key topic for speakers reflecting on the progress made globally, recessionary concerns in certain regions as well as the impact of China on the global market outlook. Thus far, China has underdelivered on their post-COVID lockdown recovery leaving commodity prices on the backfoot.

The robust US jobs market should also feature as major contributor to core inflation and with no signs of weakness just yet, the Fed may be forced to maintain the current rhetoric.

MARKET REACTIONS

DOLLAR INDEX (DXY) DAILY CHART

Chart prepared by Warren Venketas, TradingView

Daily DXY price action above could indicate an opposing view relative to fundamental factors with the index approaching overbought territory on the Relative Strength Index (RSI). Prices are also hovering around some key levels including the 200-day moving average (blue) and nearing the 104.00 psychological handle. Any dovish slant in guidance from Jackson Hole could result in a pullback lower towards subsequent support zones.

Key resistance levels:

Key support levels:

S&P 500 DAILY CHART

Chart prepared by Warren Venketas, TradingView

The SPX daily chart above is in an interesting space as higher rates have yet to effect a notable fall in prices. Currently, AI optimism is keeping the index elevated but short-term directional bias will be initiated post-conference.

Key resistance levels:

• 4512.14
• 50-day MA (yellow)
• 4400.00

Key support levels:

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