US Fed Jackson Hole meeting: What stock market expects from Jerome Powell speech today

Federal Reserve Chairman Jerome Powell's speech at the Kansas City Fed’s Jackson Hole Economic Symposium is all set to sway investor sentiment globally. It could influence currency rates, bond yields, equity flows to emerging markets such as India and also commodity prices.

Those who see Powell sounding hawkish later today premise their view on the recent Atlanta Fed's GDPNow model forecast that sees US' third quarter GDP growing 5.8 per cent. Such a solid projection in the light of healthy earnings season in the US could lend the central bank support to go with higher-for-longer rates narrative. Stock markets, though, would not like this scenario.

"While we think a strong economy should not be a bad outcome for stocks, concerns around likely much higher borrowing costs for companies appear to be offsetting any potential positive feed-through on corporate earnings from a still resilient US economy," Nomura said this week.

Ahead of the important Jackson hole symposium, probability chart from CME Fed-Watch witnessed a drop in probability for a pause in September meeting by 5 per cent to 80 per cent.

A second scenario could be Powell’s hinting at a pause for now, keeping doors open for future rate hikes -- if the incoming inflation prints demand.  This view is premised on the Federal Reserve's minutes of recent policy meet wherein the US central bank officials were divided over the need for more interest rate hikes at their last meeting.

One thing, however, is clear: hopes of a swift reversal of rate hike cycle earlier this year were misplaced.

The Fed chief is unlikely to indicate that the rate hiking cycle is coming to an end, said VK Vijayakumar, Chief Investment Strategist at Geojit Financial Services. "The message from the Fed chief Jerome Powell tonight will be keenly watched for any clues on the future trajectory of interest rates in the US," he said. 

The debate at Jackson Hole meet this time is likely to revolve around the neutral rate or R*, as the Fed approaches the end of its hiking cycle. Neutral rate is the rate at which the economic output keeps on growing around its potential rate in a scenario of full employment and stable inflation. New York Fed president Williams recently reiterated his view that R* is low. 

"He also cited model-based estimates of R*, which continue to suggest neutral rates remain near pre-pandemic levels. In our view, other Fed officials likely do not share Williams’ conviction that R* remains low. Most officials have avoided opining on neutral rates, however several FOMC participants raised their longer-run rate projections in the June dot plot. Chair Powell also appeared open-minded about the possibility of higher neutral rates in his June congressional testimony," Nomura said in a separate note.

As far as domestic stocks go, ICICI Securities suggested that a Nifty sustenance above 19,200 post Jackson Hole summit outcome would open the door for extended pullback towards the 19,800 mark.

"A failure to do so would lead to prolongation of consolidation in 19,500—18,900 range amid stock specific action," it said this week.

 

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