The main risk event for the markets this week is the gathering of major central bankers at the Fed’s annual symposium in Jackson Hole, Wyoming. The headline event will be Fed Chair Kevin Warsh’s presentation, which will be closely watched for clues about where rates will be going for the rest of the year.
Before that is the release of two key US data points that could shape how the market interprets what Warsh says. The Fed’s preferred inflation metric, core PCE price index, is expected to have accelerated in July while the second reading of US Q2 GDP is projected to confirm the economy is slowing. This provides a complicated scenario of “stagflation’ for the Fed through the rest of the year. What clues are provided about the future of monetary policy could generate substantial volatility in the market.
Gold in Focus Amid Liquidity Concerns
US data will naturally affect the dollar, but gold could be one of the more vulnerable assets to the Fed’s actions. This means that the usually calm Swiss franc could see another week of volatility. Warsh’s comments are expected in the US morning of Friday, meaning that there will be a few hours for the markets to react before closing down for the weekend.
The market has become increasingly uncertain about the Fed outlook, particularly in the longer term. The odds of a rate hike at the next meeting in September have been fairly steady over the last week or so, just over 30%. On the other hands, the odds of a rate hike by the end of the year have declined to 85% from near-certainty. This could suggest that the market believes that the longer the Fed holds off rate hikes, the less likely they will actually pull the trigger.
What the Market Is Looking For
Wednesday’s data release could provide some clues about the outlook. US July core PCE price index is expected to accelerate on a monthly basis to 0.3% from 0.1% in June. However, the core annualized rate is projected to stay unchanged at 3.3%. Traders are likely to pay attention to the difference in direction. If core inflation is rising, it would keep pressure on the Fed to hike. But, if the monthly rate is below expectations, even if the annual rate is elevated, it could lower expectations for more hiking.
At the same time US Q2 GDP is projected to confirm the deceleration to 1.5%. It’s not uncommon for there to be substantial revisions to GDP numbers, so a higher result would generally be seen as a relief to markets. It would likely support the dollar and raise the odds of a Fed hike later in the year.
What the Market Will Listen For
Warsh’s comments later in the week will be parsed through the data. If inflation pressures remain, then the market will be keen to see the Fed Chair’s rhetoric staying hawkish. But, if inflation shows signs of easing, in line with data from eariler in the month, then the market might look for signs that the Fed is worried about the economy and supporting the jobs market.
Since taking office, Warsh has been particularly harsh in his comments on inflation, so it’s hard to see how he could be more hawkish. But there are several ways his comments could be interpreted as more dovish. Those include toning down his rhetoric on inflation or expressing concern about the labour market. Both of those could weigh on the dollar but support gold.
