INTRODUCTION

The Fed’s annual Jackson Hole Symposium begins tomorrow. While some may be looking for an explicit policy signal, we believe the Fed will leave all options open for the September 20-21 FOMC meeting. However, we expect Chair Powell and his colleagues to maintain a very hawkish tone at the symposium. We also give an overview of current U.S. economic conditions.

MONETARY POLICY OUTLOOK

All eyes are on the Kansas City Fed’s Jackson Hole Symposium this week. It begins tomorrow and ends Saturday. This year’s theme is "Reassessing Constraints on the Economy and Policy" and the full agenda will be available 8 PM ET tomorrow. This will be the first in-person gathering since 2019 due to the pandemic. Last year’s symposium was moved to a virtual format at the last minute due to the spread of the Delta variant. As a result of the preparations, there are no more scheduled Fed speakers this week ahead of the symposium.

Fed Chair Powell gives the keynote speech Friday morning at 10 AM ET. In the past, the Fed has used this symposium to announce or hint at policy shifts. That said, we do not think the Fed will paint itself into a corner ahead of the September 20-21 FOMC meeting. Rather, we expect the Fed to try and manage market expectations by maintaining the hawkish message it has perfected since the July FOMC meeting. Between now and the September FOMC, we will get all the major August data and some of the early September surveys such as the preliminary S&P Global PMI readings and regional Fed surveys. The Fed will also have a better idea of how the economy is doing in Q3.

For now, Fed officials remain uniformly hawkish. Some may quibble about 50 vs. 75 bp in September but all have signaled a commitment to do what it takes to get inflation lower. Some accept that the recession may happen, while others are more circumspect. However, all accept that growth must move below trend in order to generate some slack in the economy that helps limit inflation. Updated macro forecasts and Dot Plots will be released at the September meeting while 2025 is added to the forecast horizon. We expect modest downward revisions in the growth forecasts along with modest upward revisions in the inflation, unemployment, and Fed Funds forecasts.

Fed officials are likely to continue the aggressive communication effort next week. As we saw after the July FOMC decision and then after the FOMC minutes, Fed officials blanketed the airwaves with a hawkish message. We expect a similar effort after Jackson Hole. Right now, Williams is scheduled to speak next Tuesday, followed by Mester and Bostic next Wednesday. Bostic speaks again next Thursday. We expect more Fed speakers will pop up as next week approaches.

ECONOMIC OUTLOOK

The U.S. economy is slowing but that is exactly what the Fed wants. We get another look at Q2 GDP tomorrow. Growth is expected to be revised up two ticks to -0.7% SAAR. Yet this is old news and markets are already looking ahead to Q3 and Q4. The Atlanta Fed’s GDPNow model is now tracking 1.6% SAAR growth for Q3 vs. 1.8% previously. However, it’s early on and so each data point can lead to big swings in the estimate. Next update to the model will be released later today. Of note, Bloomberg consensus sees 1.5% SAAR in Q3 and 1.4% SAAR in Q4. We know the Fed is aiming to get growth below trend in order to create some more slack in the economy; the million dollar question is whether this be a soft or hard landing.

Next week’s data will be key for the dollar’s near-term direction. Of course, jobs data next Friday is the main event. Consensus currently sees 300 jobs added vs. 528k in July, while the unemployment rate is expected to remain steady at 3.5% and average hourly earnings are expected to pick up a tick to 5.3% y/y. Ahead of that, ADP is restarting its private sector jobs estimates Wednesday after taking two months off to retool its model. Of note, initial jobless claims fell to 250k for the BLS survey week containing the 12th of the month. While the labor market remains strong, there is no question that unemployment will eventually rise as the Fed continues tightening. However, keep in mind that the labor market is a lagging indicator.

We get important survey readings as well. August Chicago PMI will be reported next Wednesday and is expected at 53.1 vs. 52.1 in July. August ISM manufacturing PMI will be reported next Thursday and is expected at 52.4 vs. 52.8 in July. Keep an eye on prices paid and employment, which stood at 60.0 and 49.9 in July, respectively. ISM services PMI won’t be reported until September 6. There is no Bloomberg consensus yet but we note that it rose to 56.7 in July, the highest since April.

The ISM readings have taken on greater importance after the weak S&P Global preliminary August PMI readings yesterday. Manufacturing came in at 51.3 vs. 51.8 expected and 52.2 in July but the big surprise was services, which came in at 44.1 vs. 49.8 expected and 47.3 in July. As a result, the composite plunged to 45.0 vs. 47.7 in July. Of note, the ISM and S&P Global manufacturing PMIs have been tracking pretty closely but the services PMIs are diverging significantly. In July, S&P Global was 47.3 vs. 56.7 for ISM, an almost 10 point difference. Will ISM play some catchup or will the divergence be maintained? Given how firm the US data have remained, we have to put more weight on the ISM measures as it's hard to reconcile S&P Global readings in the mid-40s with the firmness being seen in consumption, employment, and other hard data.

The firm labor market has helped sustain consumption. Headline retail sales for July came a bit weaker than expected at flat m/m. However, sales ex-autos rose 0.4% m/m and the so-called control group used for GDP calculations rose 0.8% m/m. It’s possible 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 0.5% m/m gain vs. 1.1% in June, while personal income growth is seen steady at 0.6% m/m.

Most inflation measures appear to have peaked. July CPI and PPI data came in lower than expected but Fed officials have been clear that it will not change its trajectory based on one or two good months of data. They want to see inflation come down significantly and we are far from it. Core PCE will be reported this Friday and is expected to fall a tick to 4.7% y/y. If so, it would reverse the acceleration seen in June and resume the fall from the 5.3% y/y peak in February. We think getting core PCE down to 3-4% is the easy part. Getting it back to the 2% target is the hard part but the Fed has signaled its willingness to keep rates higher for longer in order to get that outcome.

The U.S. yield curve remains concerning. While the 2- to 10-year curve inverted last month, Fed studies have shown that the 3-month to 10-year curve is more reliable. At 34 bp currently, it has risen from the low near 21 bp on August 10 but remains dangerously close to inverting.

The Chicago Fed National Activity Index is not signaling recession yet. The July headline came in at 0.27 vs. -0.25 expected and a revised -0.25 (was -0.19) in June. As a result, the 3-month moving average remained steady at -0.09. Recall that when that 3-month average moves below -0.7, that signals imminent recession and we are still well above that threshold. Negative readings indicate the economy is growing below trend and that is exactly what the Fed wants. Still, many fear a hard landing and so we need to keep an eye on this data series.

INVESTMENT OUTLOOK

For now, we are sticking with our broad macro calls. These include U.S. economic outperformance, a stronger dollar, lower U.S. equities, and a bearish flattening of the U.S. yield curve. Eventual inversion is a real possibility as the Fed continues to push the short end higher with its rate hikes. Yet 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 any better than the dollar; we would argue that both look worse. EM will likely remain under pressure due to tighter global liquidity and slower global growth.

Taking a big picture view, we think that the FX and fundamental outlooks can be split up into three spheres of varying conditions: 1) Asia - with China slowing, it means Japan, the Antipodeans, and Emerging Asia will suffer, 2) Europe - with much of the eurozone already in recession, it means the Scandies and CEE will suffer, and 3) North America - with the US holding up relatively better, it means Canada and Mexico should continue to outperform; the rest of Latin America is more tied to the China story via commodities and are likely to suffer.

We take issue with markets pricing in a quick Fed pivot. As things stand, the swaps market is pricing in a peak Fed Funds rate of 3.75% over the next 12 months, followed by an easing cycle over the subsequent six months. Unless inflation proves to be much easier to tame than we anticipate, the Fed is likely to keep rates at the peak for at least 9-12 months. There is also a risk that the terminal rate ends up at 4% or even higher if inflation remains sticky.

The data remain key. If inflation somehow falls faster than we anticipate, then it would be a likely game-changer for the dollar as the Fed would adjust its expected tightening path. Yet even then, the dollar may hold up better than expected since a U.S. economic slowdown would be part of a broader global downturn. Plus, the U.S. does not have an energy shortage to contend with as Europe does and so it all comes back to relative performances. PMI readings for August offer a worrisome backdrop. Besides the U.S. and the eurozone, Japan and Australia joined the sub-50 club for composite PMIs. The U.K. and China have held up a little better but it’s only a matter of time before both fall into contractionary territory.

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. Last year, there was speculation that the Fed would officially announce tapering but it waited until the November FOMC meeting to do so.