Powell in focus as markets hope for Dovish Jackson Hole testimony

• European markets on the rise
• BoJ to continue raising rates according to Ueda
• Powell to dominate as we await Jackson Hole appearance

European markets are on the rise in early trade, with equities enjoying tentative gains in anticipation of today’s Jackson Hole appearance from Fed Chair Jerome Powell. Overnight gains for the yen sent USDJPY lower once again, although the fears around the potential implications of an unwinding USDJPY carry trade appear to have eased somewhat for now. Yesterday’s unemployment claims figure saw an uptick to 232k as widely expected, maintaining the theme around a softening of the US jobs market ahead of Powell’s appearance. Coming off the back of a whopping 818,000 downward revision to the payrolls over the year to March, it is clear that the US economy has been overestimated for some time now. With the jobs market flashing warnings signs, the recent weakness for US inflation looks to have enabled a likely September pivot that could give way to a new phase that sees the Fed cut rates at each successive meeting going forward.

Overnight inflation data out of Japan brought optimism that the BoJ may be willing to hold off on additional tightening in a bid to drive down price pressures. Nonetheless, while CPI remained flat at 2.8%, comments from BoJ Governor Ueda highlighted the willingness to tighten policy further should the economic data continue to develop as expected. The recent volatility seen around the unwinding of the carry trade does heighten market concerns at times of yen strength, although the divergence between USDJPY and the S&P 500 does highlight a growing confidence that the impact of those flows will be short-term in nature.

Looking ahead, markets will undoubtedly look towards Jerome Powell’s Jackson Hole Testimony as the central factor driving market sentiment as we head into the weekend. Jackson Hole has long been utilized as a key platform for major monetary policy announcements, with the likes of Volcker, Greenspan, Bernanke, Draghi, and Jerome Powell all having made substantial declarations at this meeting in the past. This time we are expecting to see Powell lay the ground for a likely rate cut in less than a month’s time. With core PCE inflation back down to 2.6%, and the jobs market continuing to throw out warning signs, the dual mandate of the Federal Reserve provides the basis for easing that should help drive further equity gains and a weaker dollar.