Investors are hoping to soon have a better road map for navigating the Fed’s path forward on U.S. monetary policy as well as trade matters with both China and Japan.
Fed Chairman Jerome Powell will deliver a speech this morning at the annual Jackson Hole symposium.
His comments are scheduled to begin at 9 a.m. CST and officials say he will not be taking questions afterward. Keep in mind, Powell hasn’t spoken publicly since a July 31 news conference following the Fed’s first rate cut in over a decade. Since then, a number of “red flags” have been waved which some insiders believe are indications of a slowing U.S. economy and possibly even the start of a recession. Investors are anxious for any clues as to what direction the Fed is leaning in regards to future rate cuts. Odds for another quarter-point rate reduction at the Fed’s is at about 95%.
The market is also thinking the odds are between 65% and 75% that the Fed cuts yet again at their October FOMC meeting. In other words, the trade is massively leaning over the dovish side of the boat. If Fed Chair Powell doesn’t deliver that message, the market could start trimming gains as bulls backpedal.
The stock market is up +18% this year, so many argue that the market has room for a little pullback before anyone gets overly nervous. On the trade front, White House economic adviser Larry Kudlow says talks with Japan were yielding pretty good progress on agriculture and telecom issues.
The situation with China on the other hand, seems to keep finding more obstacles. There are now worries that a planned sale of fighter jets to Taiwan may cause talks to breakdown and Chinese commerce ministry spokesman Gao Feng again warned over U.S. “wrong tariff action,” vowing that adding new tariffs would force China to “adopt retaliatory actions.”
Also adding to the tensions is the ever-weakening Chinese yuan, which fell to its lowest level in over a decade yesterday. The latest hiccups come as cracks are beginning to show in the U.S. manufacturing sector. The Kansas City Fed Manufacturing Index for August, released yesterday, showed its largest monthly drop in over three years, falling -5 points further into contraction to -6. The report said the drop was driven by declines at both durable and non-durable plants, especially primary metal, electrical equipment, appliances, paper, printing and chemical manufacturing.
Even more worrisome was the drop in new orders which fell -14 points to negative -16. Economic data for today is focused on July New Home Sales with analysts expecting to remain mostly flat.
Over the weekend, President Donald Trump and other leaders of the world’s industrialized nations will open their annual G-7 summit by discussing the global economy. Trump and the six other leaders of the Group of Seven nations will begin meeting Saturday for three days in France.
According to insiders, an informal dinner is scheduled for Saturday evening, where they are expected to discuss foreign policy and security issues before more formal working sessions Sunday and Monday.
Next week will bring a slew of new U.S. economic data, including Durable Goods and Dallas Fed Manufacturing on Monday; FHFA House Price Index, Consumer Confidence, and Richmond Fed Manufacturing on Tuesday; the first look at 2nd quarter GDP, International Trade In Goods, and Pending Home Sales on Thursday; and Personal Income and Outlays, Chicago PMI, and Consumer Sentiment on Friday.
There is also some key data due on the international front, including Chinese manufacturing and inflationary data; 2nd quarter GDP estimates for France, Germany, and Canada; Eurozone and Japanese unemployment.
Keep in mind, next week is also the last week of the month and also leads into the extended U.S. Labor Day holiday weekend. Meaning liquidity near the end of the week may fade and exacerbate market volatility even further.
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