Market Strategy Radar Screen Weekly August 22, 2016

Yippie Yi Yo Ki Yay

All eyes on the Fed as officials meet in the Wild West

Attendance to the conference is by invitation only. The conference has served and gained respect as an important sounding board for ideas over the years.

Among the denizens of the economic and market persuasion Jackson Hole is considered by many to be the stateside equivalent of the event hosted by the World Economic Forum in Davos, Switzerland each year.

The theme of this year’s event in Jackson Hole (apropos central bankers’ current agenda to rekindle economic growth, employment and wage growth) is “Re-Evaluating Labor Market Dynamics.”

Fed Chair Janet Yellen will deliver this year’s opening speech on Friday (August 26th). European Central Bank President Mario Draghi will speak at lunch.

Market participants around the world will be watching televised events and interviews of attendees from the conference for any clues on monetary policy that might signal when and if the Fed might raise rates next. The market’s reaction on remarks and speeches from the conference will be tracked live by the media and by some investors like a medical technician tracks a patient’s electrocardiogram (an EKG).

While stateside economic data is showing signs that the current economic expansion is sustainable, opinion remains somewhat mixed as to when and if the Fed will raise its benchmark rate this year as economic and job growth remain overall modest rather than robust.

More Fedspeak Ahead

Over the course of the last week members of the Federal Reserve including New York Fed President William Dudley and San Francisco Fed President John Williams have made comments and expressed their respective opinions as to how soon the Fed should begin raising rates.

The San Francisco Fed’s John Williams said on Thursday that the economy is strong enough to warrant an increase in interest rates and expressed concern that if the Fed waits too long, unwanted levels of inflation and asset bubbles could hurt growth.

New York Fed President William Dudley said last Thursday that he felt the time for another interest rate hike by the Fed “is getting closer.” He also said that he expected second-half GDP would be stronger than the 1% annual rate experienced in the first half of the year and “should be more than 2%.”

On Sunday Vice Chairman Stanley Fisher said in a speech in Colorado that he expected “GDP growth to pick up in coming quarters, as investment recovers from a surprisingly weak patch and the drag from past dollar appreciation diminishes.” Speaking about employment Mr. Fisher said it has been “remarkably resilient.” He rated GDP growth so far this year as “mediocre at best.”

Recent Comments More Hawkish

Last week’s Fedspeak from such senior officials reminds us of previous Fed leadership comments this year and last year. From our perspective an increase in hawkish tone is the Fed reminding the markets that even though it has not yet seen reason for raising rates yet this year, the process of normalization is on. The effect of such comments can serve as a dampener on animal spirits that might emanate from the market as US equities hit new record highs. To us such commentary as we heard last week from Fed officials serves as a message to the markets to “curb your enthusiasm” and avoid any outbreak of irrational exuberance.

What to Expect?

From our perch on the market radar screen we are not expecting much real drama to come from the Jackson Hole conference but rather expect a reiteration and continuation of the policy and sensitivity the Fed has utilized and shown over the last seven and a half years in guiding the US economy from crisis to recovery into the current expansion.

We do expect that the interaction among monetary policy makers and other luminaries over the course of the Jackson Hole conference (particularly the dialogue between US and foreign officials) will provide significant and valuable color about the world’s regional economies and the efforts to rekindle economic growth and stave off deflationary pressures.

Look for the effects (current and projected) of robotics, algorithms, big data, the cloud, artificial intelligence and virtual reality as well as more traditional factors as globalization, nationalism and populism to be a central part of the conversational mix.

To us the real value of the Fed’s annual Jackson Hole conference is not so much in a summary outcome statement as in the progress in communications that it can generate.

As to the markets this week?

Look for the markets to surf the news flow and direction of opinions ahead of Janet Yellen’s speech on Friday while keeping a closer eye on economic data and corporate news items until the latter part of the week.

The juxtaposition of last week’s release of July’s FOMC minutes, which showed a split among officials, and the subsequent Fedspeak in the days that followed tells us that the Fed’s decision on a rate hike for now remains a work in progress.

We continue to expect that the Fed will raise its benchmark rate by 25 bps in December. We expect that the hike will be digestible and perhaps even well received by the markets when it happens. For many investors it will serve as confirmation by the Fed that things are getting better. For those who worry that the Fed has fallen behind the curve, it will provide some action to soothe their worries.

The general perception that the economy is doing better if not great and that job growth and wages are in similar stead leads us to expect the process of interest rate normalization will resume, if at a pace slower than many would expect.

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