Week ahead: Jackson Hole, Fed and ECB minutes, Italy

Week ahead: Jackson Hole, Fed and ECB minutes, Italy

An annual gathering of central bankers in Wyoming and minutes from the latest policy meetings at the Federal Reserve and European Central Bank will give investors fresh insight into monetary policy, amid growing reservations about the health of the global economy.

That and political developments in Italy will offer markets plenty to digest in the coming week. Here is what to watch:

Jackson Hole

Leaders from the Fed and other major central banks will be in Jackson Hole, Wyoming, for a summit that will draw attention from investors looking for policy clues.

The headliner will be Fed chair Jay Powell, who is scheduled to speak on August 23 at the Economic Policy Symposium.

“A revision of the general talking points is probably warranted” given the events of recent weeks and the market’s forecasts for new rate cuts, strategists at RBC Capital Markets said in a note to clients.

They continued:

While the policy papers at Jackson Hole typically stay beneath the radar, multiple media interviews with many Fed members in and around the event should garner loads of attention for obvious reasons. An exercise in hand-holding the market akin to what we witnessed in December 2018 would not be surprising. This would likely include: 1) setting the stage for, at minimum, a 25 bps cut at the September confab; 2) stressing that Quantitative Tightening is over (for those who missed it); and 3) stressing that the committee bias is now back in accommodation mode.

Last month, Mr Powell damped Wall Street’s mood when he said policymakers did not consider the Fed’s quarter-point reduction in interest rates the start of an extended period of cuts. The Fed announced a cut to its benchmark rate in response to soft inflation growth and the impact of global headwinds — including trade uncertainty — on the US economy.

The theme of this year’s conference — hosted each year by the Federal Reserve Bank of Kansas City — is “Challenges for Monetary Policy”.

Fed and ECB minutes

The Fed’s minutes from its July policy meeting, set to arrive on August 21, will allow investors to dissect the deliberations inside the central bank as it moved towards its first rate cut since the 2008 financial crisis.

The decision was not unanimous. Eric Rosengren, president of the Boston Fed, and Esther George, president of the Kansas City Fed, voted against a rate cut, citing employment gains and other signs of enduring strength in the economy.

“We expect some spin to make the meeting sound dovish, but that spin will only go so far; Powell appeared to be unable to convince the FOMC to be particularly aggressive in providing accommodation,” UBS economists said.

Meanwhile, the ECB will publish an account of its July policy meeting on August 22 after adjusting its rate guidance to suggest that rates could be cut soon.

Looser monetary policy has done little to calm investors’ nerves this month against the backdrop of escalating trade tensions between the US and China and a brief inversion of the 10- and 2-year yield curve, which is considered a sign that investors expect a recession.

Market volatility has bolstered predictions for further rate cuts in the US, with investors placing odds of about 21 per cent on a half-point rate cut in September, according to CME Group. The chances of a second quarter-point move are seen at 79 per cent.

Economic data and earnings

The parade of retail earnings will resume with Home Depot, Lowe’s, Target, Kohl’s, TJX and others due to report quarterly financials in results that will offer more evidence on consumer spending.

A rosier forecast from industry giant Walmart this week, coupled with an upbeat report on US retail sales, allayed some of the economic worries that have gripped markets.

In other data on tap, key reports include existing and new home sales in the US, consumer prices in Canada and Japan, and economic growth in Mexico. On trade, President Donald Trump has said he will speak to China’s Xi Jinping “very soon”.

Italian politics

The political drama unfolding in Italy will continue next week with an expected vote of no confidence in Prime Minister Giuseppe Conte.

The vote was set in motion after the ruling League party filed a motion of no-confidence in Mr Conte. The party’s leader, interior minister Matteo Salvini, has also called for elections three years early, looking to capitalise on momentum in public polls.

However, if Mr Conte loses the vote, President Sergio Mattarella may hold consultations to determine if a new government coalition can be formed. If those talks fail, Mr Mattarella could alternatively seek to form a caretaker government.

The renewed political uncertainty in Italy has ensnared the region’s third-largest economy. News of Mr Salvini’s call for a no-confidence vote and new elections sent yields on government debt sharply higher, though they have since retraced those gains. Next week’s outcome could have implications for global markets amid existing economic jitters.

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