Jackson Hole Primer (2018)

Abbreviated newsletter this week as nothing really changed last week…and I spent the weekend moving our oldest into her college dorm.  I spent hours stringing white lights across ceiling tile.  Clipping black and white Time Photos of the Year to the wall.  Hanging JFK posters.  It looked like a commercial for Vintage Pottery Barn.  She hung up her Kurt Cobain poster and asked if I had ever heard of Nirvana.

I showed up to college with a Reservoir Dogs poster and five outfits.  She has a tea presser and a mister.  I was stoked because it was all you could eat cereal.  Her cafeteria has a sushi chef on site 11am-3pm every day.  There’s an entire gluten free section.  Vegan options.  We had an omelette station on Friday’s and I thought I had arrived.  They have grass-fed steak options daily, farm to table days, and a sustainable seafood corner.  Here’s the worst part – she is going to the same school I went to.  Why has college gotten so expensive again?  Oh yeah, because the teaching is so much superior, right?

Last Week This Morning

• The 10T barely flinched all week, closing down 0.01% at 2.86% for the week
  • German bund same story, down 0.01% to 0.30%
• 2 year Treasury unchanged at 2.61%
• LIBOR at 2.08%
  • LIBOR should start to climb by the end of the week as we enter the 30 day window before the next FOMC meeting, which the market has a 93% probability of a rate hike.
  • LIBOR should be around 2.30% by this time next month
• SOFR at 1.99%
• Trump signed a $717B defense spending bill, which decreases the likelihood of a government shutdown but also decreases Republican leverage on other fronts
• S&P, Moody’s, and Fitch downgraded Turkey
  • S&P forecasts a Turkish recession next year
• Markets rallied Friday on a WSJ report that China and the US are in negotiations to end the spiraling trade dispute, with a potential November meeting between the two presidents serving as the formal end.
  • A more cynical market observer might wonder if Trump intentionally started a trade war with China to create the appearance of a savior right around the mid-term elections…
• UofM Sentiment Survey dropped to an 11 month low
  • Current Conditions Index, a measure of a consumer’s perception of their current financial situation, the biggest drop in 7 years.

Jackson Hole – Changing Market Structure and Implications for Monetary Policy

That’s the title of this week’s Fed symposium in Jackson Hole, a name befitting the gathering of some of the most charismatic central bankers in the world…

The event, hosted annually by the Kansas City Fed, found roots in Jackson Hole initially as a way to entice Fed Chairman Volcker to attend.  Volcker was an avid fly fisherman and KC Fed officials enlisted the help of fishing guides to pick a location for the August meeting.  Colorado was too warm for good trout fishing, so they settled on a spot mostly known for skiing – Jackson Hole.

The Fed has traditionally used this platform to float ideas and make broadly based notions, not to specifically identify monetary policies.  This week’s meeting begins Thursday and runs through Sunday.  Some things to keep an ear out for:

– trade disputes, tariffs, etc

– Turkey (or more likely the general reference to countries in similar situations)

– strengthening dollar and it’s impact on emerging markets

– new neutral rate and ability/desire to hike beyond that level

– any changes to the pace/scope of balance sheet normalization

– flat/inverted yield curve that doesn’t seem to be bothering Powell

– low wage growth

– persistently low inflation

Powell is set to speak Friday.  He is likely to be upbeat about the economy while highlighting some of the risks to the outlook.  His comments will also come just two days after the FOMC Minutes from the last meeting are released, so it seems unlikely that he will shock markets with an unexpected comment.

That being said, Powell has been refreshingly candid in post-meeting Q&A’s, so there’s a chance he’ll provide more guidance than usual.  Perhaps he will suggest the Fed may slow the pace of hikes if geo-political risks increase.

This Week

Fed Minutes Wednesday, ECB meeting and Jackson Hole starting Thursday, all to be overshadowed by whatever tweets are sent out before that.