The Fed’s annual Jackson Hole Symposium begins this Thursday. While some may be looking for an explicit tapering announcement, we believe it will come later at the September 21-22 FOMC meeting. However, we expect Chair Powell and his colleagues to continue moving the tapering discussion forward and so a hawkish tone should emerge from the symposium.
All eyes are on the Kansas City Fed’s Jackson Hole Symposium this week. It begins Thursday and ends Saturday. Last Friday, it was announced that the conference was shifting to an all-virtual format “due to the recently elevated Covid-19 health-risk level in Teton County, Wyoming” rather the original plan for modified in-person meetings. This year’s topic is "Macroeconomic Policy in an Uneven Economy" and the full agenda will be made available at www.kansascityfed.org at 7 PM CT/8 PM ET on August 26. Last year’s symposium was also all-virtual and the topic was "Navigating the Decade Ahead: Implications for Monetary Policy." As a result of the preparations, there are no scheduled Fed speakers this week ahead of the symposium.
Fed Chair Powell gives the keynote speech Friday morning. Some are looking for him to make an explicit tapering announcement at Jackson Hole. While it is certainly possible, we think the September 21-22 FOMC meeting is a more likely venue. New macro forecasts will be released then. More importantly, the Fed will have gotten another jobs report on September 3 that will hopefully be strong enough to trigger tapering. It’s clear that once tapering starts, the Fed wants to get it over quickly, perhaps in the span of six months rather than twelve. As such, our current call is for an explicit tapering announcement at the September FOMC, tapering of $20 bln in USTs and $10 bln in MBS at each meeting starting November 3, and completion by March 2022. If the economy continues to develop as the Fed expects, then this would allow for rate a waiting period of 6-9 months before lift-off in Q4 2022.
In order to keep this proposed timeline, Chair Powell should make it clear that tapering discussions are ongoing even as new data suggest further progress in meeting its dual mandate. As the July FOMC minutes showed, “Looking ahead, most participants noted that, provided that the economy were to evolve broadly as they anticipated, they judged that it could be appropriate to start reducing the pace of asset purchases this year because they saw the Committee's "substantial further progress" criterion as satisfied with respect to the price-stability goal and as close to being satisfied with respect to the maximum-employment goal.” That is why another good jobs report should seal the deal.
The list of Fed hawks continues to grow. By our admittedly unofficial count as of this writing, Clarida, Waller, George, Mester, Rosengren, Kaplan, Daly, Barkin, Evans, and Bullard have all come out in support of tapering sooner rather than later. That makes ten, or “most” of the Fed’s current eighteen policymakers. One seat on the Board of Governors remains vacant. Noteworthy doves are Kashkari, Bostic, Bowman, and Brainard. Of note, Kaplan recently tempered his call for tapering by saying he may adjust his view if the delta variant were to curb the recovery. We believe most of the Fed hawks would also line up with Kaplan. And so we are left waiting for the data.
Overall, the U.S. economy remains in good shape. We get another look at Q2 GDP this Thursday. Growth is expected to be revised up two ticks to 6.7% SAAR. Yet this is old news and markets are already looking ahead to Q3 and Q4. The Atlanta Fed GDPNow model shows 6.1% SAAR vs. 6.2% previously. That's down slightly from Q2 but is still well above the NY Fed's Nowcast reading of 3.48% SAAR for Q3 vs. 3.79% previously. Of note, BBG consensus is 6.9% SAAR for Q3, 5.6% in Q4, 3.8% in Q1, and 3.0% in Q2.
Our broad U.S. macro calls will be tested next week. August Chicago PMI will be reported next Tuesday and is expected at 68.9 vs. 73.4 in August. August ISM manufacturing PMI will be reported next Wednesday and is expected at 59.0 vs. 59.5 in July. ISM services PMI will be reported next Friday and is expected at 62.7 vs. 64.1 in July. Of note, Markit preliminary PMI readings for August were reported last week. Manufacturing PMI came in at 61.2 vs. 63.4 in July, services came in at 55.2 vs. 59.9 in July, and the composite came in at 55.4 vs. 59.9 in July. Of course, jobs data next Friday is the main event. Consensus currently sees 775k jobs added vs. 943k in July, while the unemployment rate is expected to fall two ticks to 5.2%. Average hourly earnings are seen steady at 4.0% y/y. Ahead of that, ADP jobs will be reported Wednesday and consensus sees 700k vs. 330k in July.
The firmer labor market and aggressive fiscal stimulus have helped sustain consumption this year. However, retail sales for July came in much weaker than expected, with headline down -1.1% m/m and the so-called control group used for GDP calculations down -1.0% m/m. Some believe that this weakness reflects a switch towards services consumption. If so, this would be picked up in the personal spending data, which will be reported this Friday. Consensus sees a 0.4% m/m gain vs. 1.0% in June, while personal income growth is seen picking up two ticks to 0.3% m/m. Core PCE is expected to pick up a tick to 3.6% y/y. If so, this would be the highest since May 1991. After the recent drop, energy and commodity prices have started to recover. As such, we continue to heed Bullard’s warning that core PCE could exceed 2.5% for longer than expected.
Indeed, other inflation readings remain high. July headline CPI rose 5.4% y/y, same as June and the highest since August 2008, while core CPI rose 4.3% y/y vs. 4.5% in June, which was the highest since November 1991. Headline PPI rose 7.8% y/y in July while core PPI rose 6.2% y/y, which suggest upside risks for CPI going forward.
For now, we are sticking with our broad macro calls. These include U.S. economic outperformance, a stronger dollar, higher U.S. equities, and a bearish steepening of the U.S. yield curve. Many of these calls were coming to fruition earlier this year, but the renewed rise in virus numbers globally led to a huge reset across most markets. We do not think the reset is completely over. Yet our calls hinge critically on our view that the U.S. continues to recover robustly this year. This will be tested time and again this year and we expect heightened volatility across all markets in the coming months.
We remain dollar bulls. That the dollar continues to gain despite low US interest rates confirms our view that as bad as things may get in the U.S., the rest of the world looks even worse. Dollar bears should be asking whether the euro or sterling look that much better than the dollar. In that regard, EM will likely remain under pressure. Not only are the vaccine roll-outs lagging in EM, but the more hawkish Fed and a stronger dollar should also continue to put downward pressure on EM FX .
The data remain key. If the outlook changes and the U.S. economy slows significantly, then it would be a likely game-changer for the dollar. The Fed would have no choice but to adjust its expected tapering path significantly. Yet even then, the dollar may hold up better than expected since a U.S. recession would likely be part of a broader global downturn. It all goes back to relative performances. Indeed, PMI readings for August offer a stark contrast. Japan and Australia came in very weak, obviously due to continued lockdowns amidst rising virus numbers and low vaccination rates. The U.K. came in weaker than expected and this was very disappointing given a high vaccination rate that has allowed for the reopening of the economy. Eurozone PMIs were a bit softer but overall held up very well. What about the U.S.? Stay tuned.
A BRIEF HISTORY LESSON
Roger Guffey became Kansas City Fed President in 1976. In 1977, Guffey was invited to attend the Boston Fed’s conference that focused on “Key Issues in International Banking.” The Boston Fed’s event was part of a series that started back in 1969 by then-Boston Fed President Frank E. Morris. Due to its location on the East Coast, the Boston Fed was able to attract top academics from the Ivy League schools as well as senior policymakers.
Inspired by the Boston Fed’s event, Guffey and his research director Tom Davis helped launch the Kansas City Fed’s version a year later. They chose agriculture as the topic for the first Symposium. There were more than 200 attendees that focused on “World Agricultural Trade: The Potential for Growth.” It was held in Kansas City, but moved permanently to Jackson Hole in 1982. Along with western Missouri, Wyoming is in the Tenth Federal Reserve District.
Here are Guffey’s opening remarks from 1978: “(This) symposium on agricultural trade represents the first of what we hope will become an ongoing series of conferences on important economic issues. As we developed this program, our major objective was to consider an economic topic about which important public and private decisions will be made during the coming years. We also wanted the topic to be of significant concern not only to the Tenth Federal Reserve District served by this Bank, but also by the nation as a whole. A related objective was to bring together, in a suitable setting, a group of top-level decision makers from business, government and academia who have considerable expertise in the selected topic. In doing so, the symposium would serve as a vehicle for promoting public discussion and for exchanging ideas on the issue in question.”
The Fed has used the Jackson Hole Symposium in the past to unveil significant policy shifts. Then-Chair Bernanke made the case for QE3 at the 2012 symposium and it was announced at the very next meeting in September. While no official announcement of tapering was made at the 2013 symposium, the discussion was already under way and was furthered by several presentations. Tapering was then announced at the very next meeting in September. Powell announced the Fed’s new policy framework at the 2020 symposium.