This week, global markets are holding their breath for Powell's speech

Author: Ye Zhen, Wall Street Watch

The man who dominates the fate of global markets is about to make his appearance again!

From August 22 to 24, central bank governors and economists from around the world will gather for the annual Jackson Hole Global Central Bank Conference. Federal Reserve Chairman Jerome Powell will deliver a keynote speech at 10:00 AM Eastern Time on August 23 (10:00 PM Beijing Time on Friday).

The timing of this Jackson Hole conference is quite special. On one hand, the Federal Reserve is at a crossroads regarding the potential start of interest rate cuts; on the other hand, global markets have just experienced a significant rebound after a sharp decline.

Analysts believe that whether last week's rebound can continue depends on whether Powell can provide a clear signal regarding a rate cut in September. Global markets are holding their breath, with some strategists urging caution before Powell speaks, stating, "the more the market rebounds in advance, the more fragile it may become."

01 The Higher the Expectations, the Harder the Fall?

After the unexpectedly weak July non-farm payroll report, fears of a recession in the U.S. surged, leading to a "Black Monday" in global markets. However, following the release of strong consumer data, such as retail sales, these recession fears quickly receded.

Last week, global markets saw a significant rebound, with the S&P 500 breaking a four-week downward trend, rising 3.9% over the week, marking its strongest performance since November of last year. Japanese and European stocks rose by 7.9% and 2.4%, respectively, this week.

Market expectations for a rate cut by the Federal Reserve have also fluctuated dramatically amid the market's ups and downs. Currently, the market anticipates a rate cut in September, but there is still uncertainty about the extent of the cut, necessitating clear signals for further guidance. The next employment report will be released the day before the Federal Reserve's September meeting begins its quiet period, making this late August meeting the only opportunity for the market and Powell to "communicate directly" before the September decision.

The market hopes that Powell will set the tone for a September rate cut in his speech at Jackson Hole.

According to MarketWatch, James Knightley, chief international economist at ING, stated that Powell may emphasize that inflation is moving in the right direction, which gives the Federal Reserve more confidence in achieving the 2% target. Powell may also hint that the slowdown in inflation allows the central bank to focus more on its other mission of maximizing employment:

"I suspect he will say something like, given the deterioration in the unemployment rate, we should indeed start cutting rates sooner rather than later."

However, the higher the expectations, the greater the risks. Bloomberg quoted Eric Beiley, managing director of wealth management at Steward Partners Global Advisory, as saying, "If traders hear that a rate cut is imminent, the stock market will react positively… If we don't hear what we want, it will trigger a massive sell-off."

02 Is Powell Tight-Lipped?

Analysts warn investors not to expect too many clear explanations from the Federal Reserve Chairman. Given Powell's character, he is likely to remain tight-lipped about the timing of rate cuts and even less likely to reveal how much rates might decrease.

Tom Hainlin, national investment strategist at Bank of America Wealth Management, stated, "Looking back at past Jackson Hole speeches, we are unlikely to get very guiding comments from Powell."

Former New York Federal Reserve Bank President William Dudley indicated that the Federal Reserve Chairman might suggest that tightening monetary policy is no longer necessary, but he expects Powell will not hint at the magnitude of the first rate cut, especially since there will be an employment report on September 6 for central bank officials to consider before making their next policy decision on September 18.

Steve Sosnick, chief strategist at Interactive Brokers, stated, "I call for caution ahead of the Jackson Hole meeting, especially because the more we rebound in advance, the more fragile the [stock market] may become."

From the market's reaction, the stock market has historically responded rather lukewarmly to the Federal Reserve Chairman's speeches at the Jackson Hole Economic Symposium, with most reactions being positive.

Data from Dow Jones shows that over the past 20 years, the average return of the S&P 500 during the conference has been 0.4%. The index has averaged a 0.1% increase in the month following the conference and an average return of 1.8% in the three months after the conference.

However, there have been exceptions. On August 26, 2022, Powell stated in his speech that the Federal Reserve needs to maintain restrictive monetary policy to combat inflation, which crushed investors' hopes for a swift end to the Fed's rate hikes. On that day, the S&P 500 plummeted by 3.4%.

Currently, options trading market pricing indicates that on the day of Powell's speech, the S&P 500 index is expected to fluctuate by more than 1% in either direction.