All eyes are obviously on Jackson Hole, where Janet Yellen and Mario Draghi will pontificate on how to “foster a dynamic global economy” tomorrow.
There’s considerable debate about how much Friday’s speeches will actually matter and although I don’t have any data to back this up, anecdotally it seems like “level of anticipation” has become negatively correlated with “market impact” when it comes to central bank speeches and even central bank meeting outcomes.
It seems like we’re drifting towards a state of affairs where the real danger comes from someone (or some robot) reading “too much” into something – see the aussie’s reaction to the July RBA minutes for one recent example.
Whatever the case, Draghi and Yellen will regale everyone tomorrow and it’s at least possible that one of them says something “wrong” or something “right” (depending on which side of the trade you happen to be on) and ends up moving markets.
The ECB has already doused speculation that Draghi will telegraph his next move, so any comments on a euro “overshoot” (a hot topic of late) notwithstanding, the focus will be on Yellen.
Here’s Bloomberg’s Cameron Crise with a couple of quick bullets:
- On the face of it, any event featuring both Yellen and Draghi is a big deal for markets. That’s all the more so given the relative dearth of key fundamental (as opposed to political) market drivers in recent weeks.
- While we won’t know the exact program until late on Thursday, this year’s symposium topic (“Fostering a Dynamic Global Economy”) looks relatively anodyne compared to prior forum themes, which have focused on inflation, labor markets, and monetary policy frameworks.
- It’s true that Yellen is speaking about financial stability. With equities near all-time highs, credit spreads tight, and volatility near historic lows, there is certainly ample possibility for the Fed chair to shake things up. However, it seems unrealistic to expect any sort of “irrational exuberance” moment. A discussion of U.S. and global regulatory frameworks seems more likely — at which point traders’ eyes usually glaze over.
Note that highlighted bit.
In that context, it’s worth mentioning that on Deutsche Bank’s high frequency index, financial conditions are easier today than they were in July of 2014:
Why does that date matter? Well, because as it turns out, that’s when Yellen gave another speech on “Monetary Policy and Financial Stability.” Here’s Deutsche Bank:
There is an interesting parallel between today and mid-2014 when Yellen delivered that speech. Then, as now, financial conditions were very loose. In July 2014, financial conditions, as measured by our high-frequency financial conditions index, reached the easiest (i.e. most growth-supportive) levels observed from 2010 until this year. Indeed, the mid-2014 highs in financial conditions were just surpassed in recent months.
Yet despite easy financial conditions at the time, Yellen’s speech concluded that the nature and magnitude of financial stability considerations as of mid-2014 were insufficient to justify tighter monetary policy. The key question for markets is: Has enough changed since July 2014 for Yellen to reach a different conclusion and send a more hawkish signal about the future monetary policy path at Jackson Hole?
Deutsche Bank’s short answer is: probably. And here’s the very straightforward rationale:
The 10-year Treasury term premium is more than 100bp lower, average implied volatility is lower as measured by the VIX, and equity valuations have marched higher as measured by Shiller’s cyclically-adjusted P-E ratio (CAPE). Though BBB corporate bond spreads have not tightened substantially further, they remain near the tight July 2014 levels.
So is it possible that Yellen could deliver an “irrational exuberance” moment?
Well, anything’s possible I guess.
And do note that anything she and her colleagues do or say now carries an asymmetrical risk profile that’s skewed to the downside thanks to the fact that everything is trading so rich. Which in turn means that if you’re looking for where the next crisis might originate, a good place to start would be the Eccles Building. Therein lies the irony – because remember what Yellen said just two months ago in London:
Would I say there will never, ever be another financial crisis?
You know probably that would be going too far but I do think we’re much safer and I hope that it will not be in our lifetimes and I don’t believe it will be.
