The new era for central banking: What to expect from this week’s Jackson Hole Symposium

August is lining up to be the worst month for equities for 2023 so far. A heady mix of concerns about China’s economy, stubbornly high inflation, and fears that markets were overbought has led to a sharp pull back. Chinese, European and UK stock indices are all heading for losses this month, and in the US, energy is the only sector that is in positive territory for August. The tech sector has dragged the overall market lower in recent weeks, and even the market’s darling, Nvidia, gave back some of Monday’s gains on Tuesday when it fell 2.77%. Nvidia is a good gauge of risk appetite for stocks generally, and to read the market’s current thinking about the prospect of AI boosting/ saving the global economy. Its stock is bouncing around this week and in pre-market trading it is currently up 1.5%. Where this stock goes next, and potentially where broader risk sentiment goes next, could depend on its earnings report that is scheduled for release later on Wednesday. We have already briefed you on what to expect, but it’s worth remembering that its Q1 report set the market alight, and its stock price is already up 207% YTD.

Of course, it's always dangerous to tie your expectations for future market performance to one company’s results, so, of more interest to investors this week should be the Jackson Hole central banker symposium, which takes place Thursday – Saturday, with Fed Chair Jerome Powell’s keynote speech coming on Friday. What should we expect at this gathering of the world’s most important central bankers? Below we suggest three things to look out for in the coming days:

1, Inflation and where it goes next  

Deflation is upon us, even if inflation is taking longer to come down in the UK compared to elsewhere. However, we don’t think that central bankers will declare victory over rising prices just yet. After the past year, where the main central banks excluding China have been raising interest rates to multi decade highs, we are now in a new era for central banking. The invasion of Ukraine by Russia, the pandemic and China’s structural economic problems have fundamentally rewired the global economy and central banking will need to adjust going forward. We should see glimpses of this new era for central banking during this week’s various speeches. We will be looking to see central bankers’ thoughts on the future for inflation, also how the bankers will navigate peak interest rates – how long rates need to stay high without causing economic damage, and when rates can safely be cut. This new era means that there will not be a boring central bank meeting, instead each meeting and speech will have the potential to move markets, so where stock markets go next, and investors’ tolerance for risk could be determined in the next few days. If central bankers sound too concerned about inflation, and do not signal rate cuts are coming, we could see the unreliable money and sentiment leave the markets quickly. The intelligent money will stick with risk, and high-quality companies, because this new era of central banking should make the global economy in the West more stable.

2, 10-year Treasury yields

As we approach the Jackson Hole Symposium, we have seen the 10-year US Treasury yield give back some of its recent gains. The yield is currently at 4.26%, down 6 basis points on Wednesday. The 10-year yield is still up some 37 basis points this month, as the market starts to price in a soft landing for the US economy and elsewhere. We do not think that the Fed will be unduly worried about this climbing of 10-year yields and the steepening of the US yield curve, which is still in negative territory, however at -68 basis points, it has climbed nearly 40 basis points since its low at the end of June. Ultimately, talk this week of the R rate – estimates of the neutral rate, could be the trigger for more volatility in the bond market in the coming days. The New York Fed estimates that the R rate has been rising in recent months, but that it should fall back again in the long run. However, we think the Fed and other central bankers will be wary about talking about a lower neutral rate this week, lest they are seen to flip flop between taking a hawkish and then a dovish stance in monetary policy. Instead, there are plentiful signs that due to central banks being behind the curve for so long when it comes to fighting inflation, long term mortgages especially in the US and high rates of savings in the US and elsewhere, central bank tightening is only just starting to have an impact. Thus, if central banks start to talk about lower neutral rates, it could damage their credentials and their fight against inflation. Overall, we think that the path of least resistance is for a higher 10-year yield on the back of this meeting.

3, The dollar

The greenback has been trending higher this month and is up 2.8% in the last 4 weeks. However, its YTD performance has been lacklustre, and the dollar is only up 0.41% so far this year. The short-term resistance for the dollar is 104.00, with 105.00 being a key psychological level of importance and 105.60 – the high from March – being a major resistance level. As bond yields have risen, this has tended to help the dollar to rally, although the correlation is not perfect. Thus, if bond yields rise in response to what is spoken about at the Jackson Hole symposium, then we expect the dollar to continue to rise, with the euro most at risk. If EUR/USD loses the $1.08 handle, then a move back to $1.05 cannot be ruled out. However, it is worth pointing out, that if Treasury yields fall on the back of the central bank talk this week, then the dollar is likely to follow suit.