The Investment Implications of Jackson Hole
Whatever else anyone may say about Jay Powell’s much-awaited speech in Jackson Hole, it had two distinct virtues. It was clear and it was brief, running to just 1,300 well-chosen words. In the same spirit, it is important to be succinct in discussing where the economy is and potential Fed policy going forward. Be that as it may, the Fed appears determined to sound and act tough on inflation.
First, the speech didn’t have a significant impact on bond market perceptions of the Fed’s likely rate path. By the close of business, the day of Powell’s speech, the fed funds futures market priced in a 64% chance of a 75 basis point rate hike at the next Federal Open Markets Committee meeting. The market still expects a rate between 3.50% and 3.75% by the end of the year.
Second, on the labor market, high frequency data suggested a solid jobs report between +300,000 and +400,000 on payrolls, no change on the unemployment rate and wage growth of roughly 0.4%. This could tilt the betting further in favor of 75 basis points.
Third, on inflation, the August CPI report, due out Sept. 13th, should be mild with a possible 0.1% month-over-month decline in headline consumer prices. This could reduce the market odds on aggressive Fed action, although we could still go into the September FOMC meeting with the market betting on 75 basis points in tightening.
Finally, while it is likely that inflation will continue a gradual decline, concerns about a recession remain. It is possible we see a positive real GDP growth number for Q3 and a negative number for Q4 which would increase recession fears over the next year until short-term economic drags have faded.
While it is likely that inflation will continue a gradual decline, concerns about a recession remain.
Even so, should public sentiment become more fearful of recession than inflation over the next year, the Fed may look to slowly return to the more accommodative policy which it maintained in the decade following the Great Financial Crisis. This would provide a positive backdrop for both stocks and bonds. However, any surge in volatility between now and then could lead to an even greater investor focus on defensive positioning and valuations which could favor long-duration bonds, value stocks and income-generating alternatives over more aggressive investments.
Rick Barragan is the Managing Director, Los Angeles Market Manager, for J.P. Morgan Private Bank.
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privatebank.jpmorgan.com/los-angeles
