All Eyes On Jackson Hole

Following four weeks of gains, US equities lost ground last week while equity volatility (VIX) moved higher.  Equities look likely to struggle in the days ahead.  While investor participation in the rally has been limited amid thin summer liquidity, it has contributed to easing financial conditions, likely to the chagrin of the Fed.  However, nervousness ahead of the Jackson Hole symposium (25-27 Aug) has grown with many thinking Fed Chair Powell will sound hawkish. This has given risk assets pause for thought, helping US yields back up and the US dollar to reverse recent losses.  Indeed, the USD index (DXY) now has the 14 July high around 109.29 in its sights. 

Equities could struggle to push higher in the short term.  The 200-day moving average level around 4320 for the S&P 500 looks like it will provide resistance on the top side, while the relative strength indicator (RSI) suggests that the S&P 500 is close to overbought levels.   The narrative of a bear market rally remains in place and as economic conditions worsen, the outlook for earnings will also be less positive, potentially acting as a further drag on equity market sentiment.  A stronger dollar also acts as a headwind to US stocks. 

A plethora of Federal Reserve speakers has pushed back against more dovish market expectation, yet markets are still pricing in some Fed easing in the second half of 2023. At Jackson Hole, Fed Chair Powell is likely to reinforce the view that the Fed may still have to hike policy rates several more times in the months ahead and cut less quickly than markets expect next year.  As such, last week’s move ie. US dollar rally, US Treasury yields moving higher, and equities weakening, may extend further in the days ahead. 

Emerging market currencies in particular, had a poor week, with soft China data not helping.  Indeed, China’s July activity data were uniformly weak, highlighting that the economy is likely to fall well short of the official “around 5.5%” growth target for this year.  A heatwave in China is not helping.  Today’s small 5 basis points cut in banks 1 year loan prime rates and 15 basis points cut in the 5-year rate will do little to stimulate activity especially in the property market.  CNH has been impacted and is likely to fall further. A hawkish Powell may help to keep the pressure on emerging markets in the short term and limited policy action in China will do little to mitigate such pressures. 

Aside from Jackson Hole, key data and events this week include monetary policy decisions in Indonesia and Korea. Indonesia (Tue) is likely to keep its policy rate on hold while Korea (Thu) is likely to hike its policy rate by 25bp.  On the data front, US core Personal Consumption Expenditures (PCE) will likely reveal a sharper slowing in July compared to core CPI due to shelters weights (Fri) while purchasing managers indices (PMI) data globally will likely soften as growth pressures intensify, reflecting the slide towards or into recession in several economies including the US and Euro area. 

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