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Jackson Hole Post-Mortem: "Door Still Fully Open To September Lift Off"

Curious why the S&P futures have opened down some 0.6%, wiping out the entire late-Friday ramp? The reason is that as SocGen summarizes it best, following the Jackson Hole weekend, we now know that despite Bill Dudley' platitudes "the door is still fully open to Fed liftoff in September."

Here is how SocGen describes a Fed whose posture still hints at a September rate hike:

Jackson Hole vs Market Consensus

 

Analysing the speeches and papers from Jackson Hole, we note several “gaps” to the market consensus. Top of the list, Vice-chair Fischer struck a slightly less dovish tone suggesting that all options remain open with respect to a September liftoff. New research presented, moreover, showed that US inflation is less influenced by FX rates than some in markets fear. BoE Governor, for his part, played down the China slowdown noting this did not yet warrant a change to BoE strategy. Vice President Constancio also sounded confident in the ECB’s ability to close the output gap and raise inflation. More worrying, RBI Governor Rajan warned that central banks should not be overburdened and noted mispricing of certain assets. Also notable was the apparent lack of discussion on what tools central banks have left to fight new downside risks; and this at a time when one of the more effective QE channels of emerging economies’ leverage expansion has lost its punch. A topic perhaps for the 4-5 September G20 in Ankara.

 

Door still fully open to Fed liftoff in September ...

 

Comments by Fed Vice Chair Fischer kept the door open to a September rate hike. Speaking Saturday, he noted that at “At this moment, we are following developments in the Chinese economy and their actual and potential effects on other economies even more closely than usual.” At the same time, he highlighted that “With inflation low, we can probably remove accommodation at a gradual pace. Yet, because monetary policy influences real activity with a substantial lag, we should not wait until inflation is back to 2 percent to begin tightening.”

 

Interestingly, while Fischer made reference to role of the dollar in potentially keeping US inflation low, new research from Harvard Economics Professor Gita Gopinath, (link here) suggested that the US economy is fairly “insulated” from foreign inflation/deflation pressures via exchange rates given that the bulk of US foreign trade in conducted in dollars. This is very much in line with the findings of our Chief US Economist, Aneta Markowska.

 

At present the market is pricing in a probability of just under 40% for a September rate hike, up from a low last week of 24% but still below our own baseline which sits above 50% and more dovish than our interpretation of the tone struck at Jackson Hole and recent data releases. Albeit that part of the Q2 GDP revision from 2.3% to 3.7% came from an inventory build, private demand was also robust. This week’s employment report is the key release ahead of the 16-17 September FOMC and we look for 250K. In addition to the economic data, financial conditions will play an important role in shaping the Fed’s liftoff decision; the recent stabilisation if confirmed should increase the odds.

* * *

Translation: while the Fed may or may not hike in September, the Fed itself does not know what it will do, less than three weeks until the September FOMC, but as we explained on Friday the higher the market rises, i.e., the looser financial conditions become, the higher the likelihood the Fed does hike in September after all... thereby forcing another sell off.

Good luck with that particular bit of circular logic.