Impact of Powells Jackson Hole Speech on the markets:
1. Still in consideration on Taper of USD 120 bn of monthly purchases by the Fed.
2.Many Wall Street strategists have December as their baseline Taper start-date, so that is the neutral scenario going ahead. 1/n
3. Powells speech was seen as Dovish by the markets, in that there was no nasty surprise as given in the prior Fed meeting .Sep Fed meeting may lay down a time table..
4. The three main scenarios then are: December lift off (neutral), earlier (hawkish) and later (dovish).
5. Gold bounced over 1% on Friday after Federal Reserve Chair Jerome Powell stopped short of signaling when the U.S. central bank would start withdrawing its economic support and reiterated his view that current price spikes are transitory. 3/n
6. Powell signaled the U.S. central bank will remain patient and repeated that he wants to avoid chasing “transitory” inflation and potentially discouraging job growth in the process - a defense in effect of current Fed policy. 4/n
7. Gold is highly sensitive to rising U.S. interest rates, which increase the opportunity cost of holding non-yielding bullion and boost the dollar.
8. Lending a further boost to bullion, benchmark U.S. Treasury yields and the dollar weakened after Powell’s comments. 5/n
9. Silver rose 2.2% to $24.05 an ounce, heading for its best week since May.
Platinum jumped 3.2% to $1,010.73 an ounce, while palladium climbed 0.8% to $2,411.54.
10. The dollar slid on Friday after the market perceived a highly anticipated speech by Federal Reserve Chair Jerome Powell to be dovish, even as he indicated tapering the U.S. central bank’s massive support to the economy could start by year’s end. 7/n
11. But Powell told the Fed’s annual Jackson Hole symposium that the timing and pace of tapering should not be seen as a signal for when interest rates will begin to rise, a message the market perceived as being dovish as it will keep credit cheap. 8/n
12.The dollar index, which measures the greenback’s performance against a basket of six major currencies, fell 0.42% to 92.6540.
The euro rose 0.39% to $1.1797, while the yen rose 0.23% at $109.8200.
13. Powell was clear to detach tapering from “the rate liftoff,” or raising interest rates. He wanted to ensure the market does not expect the beginning of tapering to mean the onset of a Fed tightening cycle. He was very clear to delineate that. 10/n
14. U.S. Treasury yields moved lower on Friday
The yield on the benchmark 10-year Treasury note lost 3.9 basis points, falling to 1.305%. The yield on the 30-year Treasury fell 3.2 basis points to 1.909%. 11/n
15.The Personal Consumption Expenditures index, the Fed’s favorite inflation indicator, rose 4.2% in July from the same time last year and 0.4% from the previous month 12/n
16. The University of Michigan’s final consumer sentiment data for August came in at 70.3. The sharp decline could be temporary, particularly due to health concerns caused by the delta variant of Covid-19, and doesn’t necessarily signal a coming economic slowdown. 13/n
17. US Stocks rose on Friday,Dow Jones gained 242.68 points/ 0.6%,to 35,455.
S&P500 rose 0.8% to a new high at 4,509.
Nasdaq rose 1.2% to a new high at 15,129.
For the week:Dow's up 0.9%,S&P 500 up 1.5%,Nasdaq up 2.8%.
MTD:Dow up 1.4%,S&P 500 up 2.6%,Nasdaq up 3.1%.
18.The financial markets’ reaction Friday is a sign that the Fed has successfully prepped investors for a removal of its $120 bn a month in bond buying and may avoid a “taper tantrum” like the one of 2013. Markets seem relieved the Fed isn’t planning to raise rates soon 15/n
19.“Interest rate hikes are far, far away, and investors are happy about that,Powell deserves some credit for navigating the tapering of assets, avoiding a tantrum. The market seems well prepared for the start of tapering.” 16/n
20. July personal savings rate rose to +9.6% vs. +8.8% in prior month
21.July personal income, +1.1% vs. +0.3% est., prior month revised up from +0.1% to +0.2%
personal spending +0.3% vs. +0.4% est. & +1.1% in prior month (rev up from +1.0%) 17/n
21.“It was as balanced a picture as one might expect from Powell,” said Raghuram Rajan,University of Chicago Booth School of Business “He is trying to buy time and does not want to set anything in stone.”
22.Powell’s emphasis on the uneven nature of the economic recovery,further strides needed in employment,and the risks that come with prematurely tightening policy all helped to maintain the Fed’s flexibility to proceed more slowly, especially given Delta-related concerns 19/n
23.Powell succeeded at Jackson Hole in adequately preparing investors for an eventual policy pivot, so much so that tapering is gradually becoming a “non-event”. Powell’s delinking of any tapering timeline from raising rates heeds the 2013 taper tantrum lessons. 20/n
24. Mr Powell has overseen a giant monetary response to the covid-induced slowdown. The Fed has bought more than $4trn in assets (eq to 18% of GDP), dwarfing the scale of its actions after the global financial crisis,swelling its total balance-sheet to $8.3trn. 21/n
25. He has presided over a bold gamble,keeping policy ultra-loose even as inflation soars.We expect a three-step shift:a pre-announcement at the Fed meeting in September that a tapering announcement will come at its November meeting, followed in December by actual tapering. 22/n
26. The markets will closely watch the answer to the fundamental question posed by his policies: whether the great monetary loosening, so necessary last year, can be unwound without doing great harm to the economy and the financial markets . 23/23 End.

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More from @Ajay_Bagga

13 Sep
Do fundamentals even matter?
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