Decision time
You're either in our you’re out
Market's are indecisive as we near a significant inflexion point in the US interest rates cycle and the next direction for US-China trade war to veer.
With the markets in a constant state of flux these days moving between hot and cold, it's hard to imagine that much open risk-taking is going on. So, I guess the question now as we move closer to the business part of the week is, should investor stay hedged or stay away?
Gold Markets
Gold demand continues to run cold as the rhetoric around fiscal stimulus increases. A deluge of fiscal policy is widely believed to be one of the few if not only solutions that can stabilise bond yields which could hurt gold haven demand.
But the buy-in dip trade remains supported on the back of recessionary fearmongering along with the IMF reporting that several countries were raising gold holdings.
Currency markets
The USD/CNH slid lower after the fix as local traders were in catch up mode with the move lower for the USD overnight. In swaps, there continues to be funding tightness, with t/n trading up to 7 which tempered the USD move.
Fed minutes
Not to be cynical as there may be a surprise but I'm not putting much weight behind the minutes, and certainly not overly concerned about trying to decipher the Feds exercise in literary gymnastics around the inclusion or exclusion of " somewhat."
The fact that everyone is focused on Jackson Hole speaks volumes even more so since trade war took an aggressive turn for the worse after the last FOMC rate cut suggesting that downside risk have massively increased since then. Which implies the Fed policy should proportionally increase to the downside also.
Jackson Hole and policy implications
On the cusp of the Jackson hole conference, investors are pinning hopes on the coordinated melding of fiscal and monetary policy, but at a minimum and to keep the ship afloat, the event needs to produce the Fed's next stimulus plan. Sure, now and again, something significant does come out of the central bank soiree but are we setting ourselves up for disappointment??
I think not
The global economy is slowing again, the US is only just holding above the potential growth line, and US/China tariffs are likely to drop US growth below that break even. Bond curves are inverting, the market either thinks central banks are behind the curve or lack the necessary firepower to stabilise growth against the negative knock effect of tariffs.
Jackson Hole won't be about loosening policy but rather how to stimulate the global economy when monetary policy is on max loose settings anyway.
The Feds waxing dovish is a given, but the Jackson hole presents the perfect stage to lay down a blueprint for what comes next. And that's to detail an all-encompassing risk management plan as to how fiscal and monetary policy can be combined to tame not only the bond market beast but also to bolster global equity market sentiment.
The Fed easing will help, but they can't go it alone. Despite the considerable GDP bounce from US consumer spending, there was economic drag across everything else, sounding off alarm bells about the trajectory for US manufacturing growth and suggesting that its a big ask for Federal Reserve policy alone, even a 50 bp bazooka, to save the day and keep the Trump Bump alive. Frankly, I think investors may want to place more emphasis on the idea of a payroll tax cut in the US, which fits perfectly in the where there is smoke there is fire category.