We’ve been anticipating several potentially market-moving events in the weeks to come (see here for a list), and this morning we scratched off the first, and perhaps most consequential of all of them: Federal Reserve Chair Powell’s speech at the Kansas City Fed’s Jackson Hole conference.
The headline, as I see it, is that Powell finally confirmed that the long-awaited “Fed Pivot” will be upon us at the September 18th FOMC meeting. Huzzah! We’ve been waiting for that pivot for years. (Remember, the 2022 speech was greeted by a -3.3% selloff because Powell dashed hopes for a pivot two years ago.) There is certainly some real importance to the Fed Chair ratifying market expectations.
Frankly, we didn’t learn much this morning. The speech certainly reinforced the Fed’s commitment to both sides of the dual mandate and largely committed them to the course of action that seemed clear after the last post-FOMC presser. But while we had real assurance that the long-awaited “Fed pivot” has finally arrived, we still don’t know the pace and depth of the projected cuts. Data and the other Fed speakers will round out that message.
This is when I look to other markets for clues. Expectations for rate cuts rose marginally, if at all. The CME FedWatch tool currently shows a 33% likelihood for a 50-basis point cut, up from 31% yesterday. Yay! The IBKR ForecastTrader still shows an 85% chance for a Fed Funds target above 4.875% in September. If Powell had signaled something new, those probabilities would have changed meaningfully, not imperceptibly. While equity markets are higher and bond yields lower, they have essentially only recouped yesterday’s losses. If yesterday’s selloff was attributable to pre-Powell jitters, then today’s rally can be chalked up to the fact that we’ve reset expectations back to wear they were two days ago, not to an entirely new level.
This tells me that the speech ratified, rather than truly educated.
I was asked this morning if the next FOMC meeting is likely to be a “sell the news” event. If the cut is 25bp, which is still the prevailing probability, then yes, it is likely to be a sell the news event. Heck, we can assume that the 1/3 of folks who are currently hoping for 50 will be disappointed. But that’s a huge IF. Powell continues to stress data dependence, and we have several key important data points on both sides of the dual mandate:
August 30th: Core PCE
September 6th: August Nonfarm Payrolls and Unemployment
September 11th: CPI
September 12th: PPI
September 18th: FOMC Announcement
The PCE, CPI, and PPI data will be important for the stable prices mandate; the September 6th jobs report for the full employment side. Those can and should influence the rate cut outlook between now and then. If the FOMC is data dependent, then by extension we all are.
Thus, in the short-term I’m a bit cautious. We’re heading into a seasonally difficult period with a series of potentially market-moving data points, as mentioned above, with a significant amount of good news already priced in. And before any of those economic data points arrive, we get Nvidai (NVDA) earnings. Those could have an immense impact on markets (not the Fed, of course), especially if they fail to exceed the lofty expectations that have been priced back into the stock after its recent rally. And if they give any hint that AI spending is plateauing, it will affect a wide range of AI-related favorites (AMD, ARM, MSFT, GOOG, etc.).
Remember, the past four Septembers have been negative (-3.92%, -4.76%, -9.34%, -4.87% in the years 2020-24), with ’20 and ’21 dropping after very good Augusts (+7.01%, +2.9%). We’re up about +2% this month, so we’re hardly immune. I’d be opportunistically buying volatility if VIX dips to around 15 or less, enjoying 5% yields on cash while it lasts, and looking toward more value-oriented stocks, especially those with cash flows sufficient and predictable enough to support relatively high dividend payouts. Chasing momentum is tempting, but potentially treacherous at this time of year.
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