- Jackson Hole speech sent Wall Street to fresh highs
- Tapering could start this year, but there is no sign or urgency
Wall Street stocks rallied to fresh all-time highs on great breadth (470-30 advancers to decliners) whilst bond yields and the US dollar dropped as Fed chair Jay Powell gave a clear signal that the US central bank is not in a tearing hurry to taper bond purchases – or raise rates. And in fact it could be the push back on the hiking rather than taper timeline that is more important for the market reaction right now. Gold also rallied as yields and the dollar lost ground, offering support to the metal, before retracing a chunk of the move back to $1,800.
In a speech that mentioned inflation 82 times, Powell sought to explain over and over why inflation remains transitory. Methinks he doth protest too much, springs to mind.
What did we learn? Powell is a dove and wants more time to assess the data on employment – as we talked about this last week, the reasons for using this speech to signal the taper have reduced since the July FOMC. Critically the ‘substantial further progress’ criterion for the labour market has not been met yet. Powell is still fully behind the idea that inflation is transitory – but took a huge amount of the speech to explain why, which I guess is answer to critics and hawks on the committee as to the delay in getting on with the taper. And Powell is doing all he can to avoid a taper tantrum - he’s still saying that the Fed is overwhelmingly likely to taper this year but is not pre-committing to a schedule before he needs to.
Kneejerk move is to sell the dollar, buy stocks. As well as the records on Wall Street, European indices ticked higher following the release of the speech.
Yields lower – 10s hit session lows below 1.32 per cent which is best for mega cap/growth/momentum so top index points drivers for SPX at present are Facebook, NVIDIA, Tesla, Alphabet, Apple, Netflix.
DXY breaking out of the recent range.
S&P 500 record high
No rush to taper
Powell stressed that while the "substantial further progress" test has been met for inflation, it has not yet for the employment mandate. Though he stressed that clearly there has also been clear progress toward maximum employment. “At the FOMC's recent July meeting, I was of the view, as were most participants, that if the economy evolved broadly as anticipated, it could be appropriate to start reducing the pace of asset purchases this year. The intervening month has brought more progress in the form of a strong employment report for July, but also the further spread of the Delta variant. We will be carefully assessing incoming data and the evolving risks. Even after our asset purchases end, our elevated holdings of longer-term securities will continue to support accommodative financial conditions.”
Tapering is not tightening
Echoing comments from a number of Fed speakers in the last couple of days and consistent with previous guidance, Powell stressed that tapering is not the same as tightening or a hike. “The timing and pace of the coming reduction in asset purchases will not be intended to carry a direct signal regarding the timing of interest rate lift-off, for which we have articulated a different and substantially more stringent test. We have said that we will continue to hold the target range for the federal funds rate at its current level until the economy reaches conditions consistent with maximum employment, and inflation has reached 2 percent and is on track to moderately exceed 2 percent for some time. We have much ground to cover to reach maximum employment, and time will tell whether we have reached 2 percent inflation on a sustainable basis.”
Inflation still temporary
Powell said inflation at current levels is a “cause for concern”, but this is tempered by factors that “suggest that these elevated readings are likely to prove temporary”. Certain effects causing inflation should “wash out over time”, with the Fed chair noting used car prices (a huge driver of CPI numbers lately) which are now falling. “The spike in inflation is so far largely the product of a relatively narrow group of goods and services that have been directly affected by the pandemic and the reopening of the economy."
Powell also batted away fears about the sort of "wage–price spiral" seen at times in the past. “Today we see little evidence of wage increases that might threaten excessive inflation,” he said. And inflation expectations are not moving anything like actual inflation, which is “noisy”. “As long as longer-term inflation expectations remain anchored, policy can and should look through temporary swings in inflation.”
Powell also noted longer-term structural reasons for inflation not to get ahead, noting the prevalence of global disinflationary forces over the past quarter century. “While the underlying global disinflationary factors are likely to evolve over time, there is little reason to think that they have suddenly reversed or abated. It seems more likely that they will continue to weigh on inflation as the pandemic passes into history.”
Neil Wilson is chief market analyst at Markets.com
