Emerging market traders braced for Powell

The Federal Reserve’s policy has a big impact on emerging markets, so traders will be paying close attention to any clues from Jay Powell on the direction of policy.

Piotr Matys, EM strategist a Rabobank, explains:

Remarks from Fed Chairman Powell, who will speak later today at the famous annual gathering of central bankers and economists in Jackson Hole, will set the tone for the CEEMEA currencies.

Volatile financial markets will be looking for a relatively strong reassurance from Powell that under his leadership the Fed will lower interest rates further in the coming months.

The risk, essentially, is that Powell may not be able to make sufficiently strong commitment on behalf of the divided Committee to meet market expectations for more interest rate cuts this year.

Amongst those closely watching Powell’s speech due to start at 15:00bst will be President Trump.

If the US was like Turkey, Trump would have already replaced Chairman Powell with someone who “follows instructions” on interest rates as President Erdogan had done abruptly dismissing Governor Cetinkaya for his reluctance to cut rates

Fed rate expectations and the markets

Just in case you needed a reminder of how closely linked expectations for Federal Reserve policy and the trade war are — look no further than today’s China tariff announcement.

It took only seconds for federal funds futures, used to speculate on future fed rate decisions, to move in response to China’s trade escalation.

READ ALSO  PetSmart scraps debt deal after investor push back

The chart below shows expectations for the end of this year. The rise indicates a small (but illustrative) tick down in market forecasts for where the Fed’s main rate will end 2019.

President Trump weighs in

In perhaps the least surprising news of the day, President Trump has continued his long-running push for the Fed to cut interest rates.

A few moments ago he exhorted the central bank to ‘show their stuff.’

Investors look for clues on September rate decision

Investors and analysts will be watching for any signs of how the Fed might act at its September policy meeting.

Deutsche Bank economists said:

“The immediate focus of Powell’s speech will likely be whether he affirms that the current easing is a ‘mid-cycle adjustment’ as per the FOMC minutes or align more closely to market pricing.”

Investors might be disappointed if they are looking for anything concrete, however.

“It is premature to expect a signal on the size of the Fed’s September move,” said Morgan Stanley’s US economists who instead expect Mr Powell to maintain flexibility by repeating that the central bank “will act as appropriate to sustain the expansion,” and not offer a clear tilt towards an unusually large 50 basis point rate cut.

“The chance for disappointment in Powell’s messaging is rising,” Morgan Stanley added.

US stock futures and European markets hit by China tariffs

It is probably not the backdrop Jay Powell was hoping for ahead of his key speech in just a little over an hour.

READ ALSO  Google ad sales bounce back sharply from pandemic slump

China has announced that it will hit $75bn in US goods with additional tariffs. It marks the latest escalation in a damaging trade skirmish.

The trade war has hit major economies across the globe, and the uncertainty it has sparked for corporate America has been a worry for the Fed.

In a sign of the heightened sense of gloom, US stock-index futures took an immediate hit after the tariff announcement. S&P 500 futures are currently down about 0.5 per cent. The European Stoxx 600 index also fell, leaving it down 0.8 per cent in the last 50 minutes.

A big day for global markets

Welcome to the FT’s live blog of Jay Powell’s address to the annual Federal Reserve conference in Jackson Hole. We’ll be bringing you updates on the central bank chief’s speech in real time from our reporters in Wyoming, New York and London.

The blog officially kicks off at 9am New York time (2pm in London). In the meantime, we’d love to hear from you.

What are your expectations? And what would you like to see us cover? Let us know in the comment section.

What happens at Jackson Hole?

Monetary policymakers from around the world have met annually in the mountain resort of Jackson Hole in Wyoming in late summer since 1978, hosted by the Federal Reserve Bank of Kansas City.

Flanked by the Grand Teton mountains, central bankers have used the scenic setting to exchange ideas on the key policy issues of the day, with the Kansas Fed promising “an ideal environment for symposium attendees to discuss economic policy issues away from daily pressures and distractions.”

READ ALSO  Each race, a new race - Thousands of Brazilian politicians are changing racial identities | The Americas

With a president putting unprecedented pressure on the Fed to act and markets expecting sharp cuts to interest rates, Jay Powell may find it a little harder than usual to put those distractions to one side this year.

Via Financial Times