Jackson Hole, China Crisis In Focus As August Melts Away

Jackson Hole, and specifically what Jerome Powell has to say on Friday morning, is the focal point for anyone unlucky enough to be tethered to a terminal this week.

Out-of-office e-mails remain a fixture in my inbox. If it weren’t August, and the replies weren’t instantaneous, I’d be sympathetic to the notion that people aren’t interested in interacting with me, even virtually. But it is August, and it’s been a decade since I was in the bridge-burning business, so I’m quite confident the preponderance of autoresponders is indicative of expensive sojourns and weddings, not a reflection of humanity’s generalized aversion to my correspondence. If past is precedent, I should expect “peak autoresponder” between now and Labor Day.

I’ve never been much for vacations myself (unless you count my seven-year island exile which ended early this month with a return to pseudo-city life), but even if I enjoyed getting away, I’d keep one eye on current events this week. China is teetering rather precariously on the precipice of something bad, and more intervention to prop up the flailing yuan is virtually guaranteed. If the Party fears anything, it’s social unrest, and as detailed in a special edition of the weekly+, the perceived loss of economic opportunity can sow the seeds for widespread disenchantment. The implication: Beijing will eventually acquiesce to the necessity of big-ticket fiscal measures.

The PBoC on Sunday published a comically obsequious readout detailing a joint video conference involving the PBoC and the Securities Regulatory Commission. Pan Gongsheng, who recently supplanted Yi Gang, presided over the event. I challenge you to peruse the following excerpt from the accompanying PBoC statement without emitting a wry chuckle (or two or three):

The meeting held that since the beginning of this year, under the strong leadership of the Party Central Committee with Comrade Xi Jinping at the core, the financial sector has resolutely implemented the decisions and deployments of the Party Central Committee and the State Council, and continued to support the recovery and development of the real economy. The meeting pointed out that my country’s economic recovery is a wave-like development. The financial sector must conscientiously study and understand the spirit of the Political Bureau meeting of the Central Committee, continue to implement the precise and powerful requirements of a prudent monetary policy, make good use of the policy space, identify the direction of efforts and continuously promote the improvement of economic operations, the strengthening of endogenous power, the improvement of social expectations and the continuous resolution of risks and hidden dangers.

Once again, markets were left with all questions and no answers. Banks were instructed to step up lending and “optimize” mortgages, but as evidenced by the latest credit data, households are deleveraging. Nobody wants credit. Domestic demand is anemic. The government needs to spend since nobody else will. Until China’s “responsible comrades” (to quote again from the PBoC readout) come to terms with that, the economy will continue to struggle.

Back at the ranch (figuratively and almost literally given the scenery for this week’s meeting of the minds in Wyoming), the Fed is likely fine with market pricing for the remainder of this year’s policy gatherings, although the hawks would presumably rather see a bit more in the way of rate hike premium priced across the September and November FOMC meetings.

Next month’s meeting is ostensibly live, but the market isn’t pricing it that way. The odds of a hike are less than 10%. Markets see about a one in three shot of another hike by December — that’s probably about right.

Those odds constitute “an endorsement of the effectiveness of the previously offered communication from the Committee that with Fed funds at its highest level since 2001 and firmly into restrictive territory, additional tightening from here will need to be a function of the incoming data,” BMO’s Ian Lyngen and Ben Jeffery remarked. “By already having laid the groundwork for September 20th to be a skip, the FOMC has bought sufficient time to evaluate two more months of inflation and jobs data [so] we expect Friday’s prepared comments [from Powell] will focus on the broader issues that continue to define trading in the Treasury market such as the durability of the 2% inflation target, and whether r-star has moved higher following COVID.”

The theme for this year’s Jackson Hole conference is “Structural Shifts in the Global Economy,” so you’d expect to hear plenty about… well, about structural shifts, including and especially the possibility that the Great Moderation is over and all that entails for monetary policy (e.g., a higher long run neutral rate). I doubt seriously that central bankers will express anything like openness to the idea that inflation targets should be altered in the near-term, even if temporarily humble policymakers pay lip service to the idea that a reassessment could be useful over the longer run.

“While the Fed will not fully close the door to additional rate increases, we expect the end-of-the-tightening-cycle message to dominate Fedspeak in coming weeks as we approach the September FOMC meeting, and it might even be a prime candidate for the topic of Chair Powell’s Jackson Hole speech,” TD’s Oscar Munoz wrote, adding that in real terms, policy only became restrictive in Q4 2022 and Q1 of 2023, “which supports the view that the bulk of the impact is yet to be fully transmitted to the broader economy.” Although TD expects a recession early next year, they noted that “the majority of Fed officials appear to be assuming a ‘soft landing’ as the most likely outcome [and] as a result, the Fed is aiming to keep policy largely restrictive through 2024.”

Jackson Hole plays out against a backdrop of cycle-high US yields brought to you by August’s reals-led long-end selloff.

Analysts and strategists offered a variety of explanations for the move last week. Ultimately, consensus coalesced around “longs reducing duration” which is amusing, not because it’s wrong but rather because it can’t help but be at least partially right. (If not “investors selling long-end bonds,” then what?)

As Bloomberg correctly pointed out, this week’s auctions — the 20-year sale on Wednesday and 30-year TIPS on Thursday — could be dicey, or at least interesting. Those aren’t reliable issues. To the extent there are natural buyers, you really need them to show up. Poor August liquidity opens the door for outsized price action on any news at all. Given the focus on increased supply, the highest reals in over a decade and the absence of scheduled events other than Jackson Hole, this week’s auctions could easily constitute “news.”

Also on deck in the US: Existing home sales, new home sales, flash PMIs from S&P Global and the final read on University of Michigan sentiment for August.