Opinion widely split after Jackson Hole “non event”

The burning question is: will the US Federal Reserve start reducing its balance sheet next week? Investment experts are divided.
Opinion widely split after Jackson Hole “non event”

With investors eagerly awaiting signals on US balance-sheet unwinding and tapering of European bond-buying, the meeting of central bankers in Jackson Hole, Wyoming was seemingly a “non event”. It has merely served to prolong market uncertainty, judging by the variance in opinion among market experts on what will happen next.

Some argue the unwinding will proceed despite the lack of guidance, while others take the opposite view.

In the former camp is Bryan Carter, London-based head of emerging markets fixed income at BNP Paribas Asset Management. Investors were alert for a hawkish message from US Federal Reserve chairwoman Janet Yellen signalling the start of balance-sheet shrinking next week, but none came, so the bearish sentiment has subsided, he told AsianInvestor.

“The market has been jolted by the surprise ‘no message’,” Carter added, and that contributed to the lower US Treasury yields and weaker dollar over the last few days. 

But he said there was a high chance that the balance-sheet reduction would still take place next month despite there being no mention of it at the symposium. A move in that direction would push up bond yields and spark a rebound in the greenback, he added.

“This is a great moment to position for a change in volatility in September,” Carter argued.

Janet Yellen, US Fed chairwoman at Jackson Hole last Thursday

Kerry Craig, Melbourne-based global market strategist at JP Morgan Asset Management, echoed this view. The lack of comment on monetary tightening indicates that Draghi and Yellen have not changed their plans, he told AsianInvestor.

The European Central Bank still thinks money should be cheap, Craig said, while the Fed is set to continue to raise interest rates and, more importantly, to start to shrink its balance sheet in September despite rising inflation.

Craig therefore expects the dollar to strengthen in the near term, but argued that the American currency was on a downward trajectory in the long run. He put this down to the US trade deficit, an eventual recession as the US moves into the later part of the economic cycle, and better opportunities elsewhere.

Dovish view

However, Grace Tam, Hong Kong-based senior market specialist at HSBC Global Asset Management, disagreed with Carter and Craig. The market takes silence as a dovish stance, she said, and thus believes tightening and interest rate hikes are not coming soon.

The US dollar is weakening and Treasury yields are falling, and the former is beneficial to emerging markets in Asia, she told AsianInvestor. Regional stocks are therefore likely to outperform in the near term, especially as corporates are posting strong profits in the current earnings season, she said. 

In any case, the Jackson Hole meeting has turned out to be a “non-event” for the past few years, noted Tam, resulting in little market movement. HSBC Global AM has not altered its portfolio positioning, she added.

Yet the “non-event” still gave an important signal to the market, said Craig of JP Morgan AM. Neither Yellen nor Draghi talked about their currencies or gave any signal on monetary policy, he noted, leading the euro to strengthen and dollar to weaken. 

Political implications

The Jackson Hole meeting also gave an important political message, said Samy Chaar, Geneva-based chief economist at Swiss private bank Lombard Odier.

He argued that Yellen’s defence of financial regulation and Draghi’s support of globalisation and economic openness were rebuffs to policies mooted by Donald Trump favouring protectionism and cutting back on financial rules.

Such views were no doubt warmly welcomed at an international meeting of central bankers.

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