The most important element by far in the Jackson Hole keynote speeches was what was not said rather than the actual content with silence on policy triggering a surge in the Euro and fresh dollar slide. The overall Jackson Hole impact is likely to be limited, especially with the focus shifting quickly to factors such as Hurricane Harvey, the US debt ceiling and threat of a government shutdown. Markets will look to test the limits of Euro strength and dollar weakness, but with the threat of a sustained increase in volatility.
The title of the 2017 Jackson Hole Symposium was ‘fostering a global economy’.
There were a series of discussions dealing with such aspects as achieving balanced global growth and balancing short-term fiscal stimulus with longer-term sustainability. There was also a significant discussion on the changing landscape of international trade.
The overall tone of the debate was a greater focus on moving beyond the financial crisis with a perception that the global economy is moving into a new phase.
From the market’s perspective, however, there were only two speeches which garnered significant attention and certainly triggered a very notable market reaction.
At previous Jackson Hole events, reaction to central bank commentary has primarily been based on what has been said. Fed Chair Bernanke, for example, signalled the move to introduce a third round of quantitative easing at Jackson Hole in 2012 and ECB President Draghi pre-announced the central bank’s quantitative easing programme when he appeared at the event in 2014.
This time, the market reaction was triggered entirely by what was not said. In this context, positioning ahead of the speeches was also important for the subsequent reactions.
Fed Chair Yellen delivered a speech titled ‘financial stability a decade after the onset of the crisis.
According to Yellen, substantial progress had been made toward the Federal Reserve’s objectives of maximum employment and price stability. There was also now in place a regulatory and supervisory structure that is well designed to lower the risks to financial stability and in achieving a stronger financial system.
The strength of the comments on financial regulation triggered some speculation that the chances of Yellen’s re-appointment as Federal Reserve Chairman was less likely given President Trump’s determination to roll-back regulation.
Yellen made no significant comments on the US economic outlook or monetary policy in the speech.
To some extent, the lack of commentary was no surprise as the Fed is likely to keep interest rates on hold at the September FOMC meeting and likely to concentrate on announcing the balance-sheet shrinkage plan.
There had, however, been some speculation that Yellen would look to harden expectations surrounding a further rate increase this year.
In the event, the lack of rhetoric on monetary policy pushed Fed Funds futures in the opposite direction with the chances of a rate hike by December declining to around 36% from 40% previously.
The other main speech at Jackson Hole was by ECB President Draghi.
There had been some speculation that Draghi would look to make a dovish speech and play down the potential for any near-term move to taper bond purchases.
There was also speculation that the bank President would look to take the opportunity to talk down the Euro.
In the event, Draghi also made no comment on the Euro in his speech. The main thrust of Draghi’s comments was that stronger productivity was needed to raise potential output growth and a crucial element in this process was for open trade. He wanted a strengthening of multilateral institutions to safeguard against a slide towards protectionism, although also insisting that these institutions needed to be accountable to elected representatives.
Draghi was optimistic surrounding the global economic outlook which suggests there is potential for upward pressure on bond yields, although the immediate moves have been to push yields lower, especially with a fresh spike in risk aversion.
The lack of protest against Euro gains was taken as a green light by the market buy the Euro with reduced fears of any ECB move to cap the currency. The impact was magnified by the positioning bias into the event with some Euro selling in anticipation of a dovish set of remarks.
The overall message, however, will be seen as indicating that there is no sense of urgency in shifting markets expectations with eventual policy actions at forthcoming meetings more powerful than rhetoric.
Short-term traders will be more confident in pursuing the existing strategy of dollar selling and Euro buying and testing the market limits. In this context, EUR/USD has been pushed above 1.2000 for the first time since January 2015 with the dollar index at fresh 15-month lows.
Inevitably there will be some speculation that the ECB is waiting for market positioning to become even more extreme before launching verbal intervention. In this environment, there is likely to be a sustained increase in volatility across major currency pairs, especially with a transitional period to more normal trading volumes underway as summer holidays in the US and Europe come to a close.