So… Jackson Hole this week. I’m wondering if we’re due another seminal one. Remember some of the key speeches from years ago where Greenspan and Bernanke identified topics that became a focus for the market in the succeeding years. There are obviously major issues that central bankers can highlight which will set the tone for the next 12 to 18 months: soft labour markets; wage growth; how to normalise economies after years of zero interest policy (ZIRP). Any of these topics could give a boost to volatility in front of key macro data events in the next year. Lord knows we could all do with a bit of volatility. I know it might seem a strange thing to say, but what we have in global capital markets at the moment is not normal. It’s so abnormal that in many ways it terrifies me! Primarily because of what might happen before we can get back to normality. Anyone expecting volatility to trend higher in a gentle way is probably being far too optimistic, markets don’t generally work that way.
Anyway, the focus at Jackson Hole this time around appears to be labour market dynamics. We should expect to get an insight into how Federal Reserve guidance on labour market data will prepare normalisation of short term interest rates. I’m not sure there’s anything more important that this in the macro-scope right now. The speed at which rates go up will dramatically impact the value of the US dollar, risk sentiment, the appropriate discounting mechanisms for stock valuations. The price of tins of baked beans, and guns… you name it. It is a very big deal! Just hints about Fed thinking regarding normalisation have dramatically impacted risk sentiment in the last 12 months, now we’re that much closer to such events actually happening. I get goose bumps just thinking about it!
For now, I suspect the recent Bank of England Quarterly Inflation Report encapsulates the reality the Federal Reserve is facing. Solid looking employment growth with tepid wage growth. Central banks will pay more attention to the weakness of wage growth for now despite the obvious rationality of the current phenomenon. We should all feel better that as employment growth continues to improve, there’ll be a lesser burden on social security outlays, which will improve the fiscal position, which will lower long term rates etc etc. My point is… despite central banker concerns we’re probably a lot closer to things getting even better.
Let’s see where the markets are right now… the dollar is backing off from recent strength today and equities are looking a bit firmer, with the NASDAQ posting year to date highs this morning. Yet again I believe key levels in the dollar index have held, which doesn’t bode well for uber dollar bulls. As you’ve probably guessed, I’m doubtful that Yellen’s speech on Friday will be what dollar bulls need. In any case most of its victims – EUR, GBP – look due for a bounce. The case for a cable bounce looks far more obvious than for EUR/USD, so I’m inclined to see EUR/GBP weakness ahead, but only in the very short term. It does look like the head & shoulders bottom reversal is in play, which means our target should be close to 0.8100, but there’s nothing stopping a dip back over the day.
The new high in the NASDAQ has seriously dented my belief that we’re likely to see a deeper correction. This fits in with a narrative that anticipates a more dovish speech from Yellen than perhaps the market would have expected. Tech outperforming broader markets tends to be a bullish signal, and new highs just reinforce that suspicion.