Mid-Week Update
There isn’t really much to add relative to what I have written on Monday’s ATW. Trading days now appear to have the summer blues instilled in them while we are awaiting the Jackson Hole speeches. Jackson Hole, historically, is occasionally used as a policy re-calibration event when our policymakers believe markets to be totally misunderstanding their wishes. I find it hard to believe that Powell has any problem with what markets are currently pricing. If anything, he is probably not overly happy that the market is still pricing them on an aggressive cutting path for this year. Everything is possible, but the current macro is not dictating such a stance yet. Still, he would like to keep his options open, especially with payrolls and inflation data coming in ahead of the September 18th meeting. For me, it is most likely going to be a non-event.
As for the Kansas City Fed-organised event, it is interesting that one paper recently published discusses the effectiveness of interest rates and why they have failed to slow down the economy. It’s maybe not the conclusion but certainly the question that is making wonder whether these sort of questions are also asked behind closed central banker doors. The conclusion would be that rates were ineffective in tightening conditions and should, therefore, not hastily be reduced.
Here is the paper’s conclusion.
“In summary, recent monetary policy tightening appears to have been less restrictive than expected largely because private-lending spreads have been unusually low. The excess bond premium usually rises sharply and persistently following a monetary contraction and slows economic activity: Gilchrist and Zakrajšek (2012) estimate that an increase in the excess bond premium significantly reduces growth and inflation. However, the excess bond premium has remained low during the current tightening cycle. Understanding why the excess bond premium is low and whether policy has played a role is important not only for predicting the effects of future tightening, but also for understanding how expansionary potential rate cuts will be. Because spreads did not increase during monetary policy tightening, they may not decrease as much as expected during loosening, which may require policy recalibration.”
Maybe we should infer by the Jackson Hole paper titles what kind of policy questions our monetary leaders are asking rather than eagerly waiting for their answers. They, like us, just don’t know.
Let’s now read Macro D’s latest thoughts on markets before updating some of the charts ahead of the second half of the week.
Let’s go straight to it.