US stocks are struggling for direction as investors await Fed Chair Powell’s Jackson Hole speech on Friday. In the past, central bankers have used the Wyoming summit to announce major policy shifts and many are expecting Powell to walk back some of his commentary from last month’s post-rate decision press conference where he said the rate reduction was merely a “mid-cycle adjustment.” Some analysts believe Powell could emphasize the risks to the global economy and leave the door open for a half a percentage point cut.
Since last month's Fed policy decision, the situation in Hong Kong has intensified, no-deal Brexit risks remain high, and the temporary relief we saw with the US-China trade war is starting to get overshadowed by the transatlantic trade spat. The global risks and longer-term deflationary concerns justify more rate cuts and extraordinary measures.
Regardless of what Powell does, he will be criticized. If he takes back his mid-cycle adjustment comment and signals more cuts and QE could be on the table soon, it will look like he has fallen to President Trump’s pressure. If Powell refrains in signaling more easing is coming, he will risk having the bond market overreact and crush Treasury yields, possibly raising the argument we could see negative yields eventually in America.
EZ PMIs
Eurozone manufacturing is contracting at a slower pace and services is picking up. The positive headlines help prop up the euro but by no means signal a bottom or for a reason to be optimistic. German manufacturers are still pessimistic and the risks for the largest country in the bloc are high they will see a recession. The ECB is already poised to deliver more rate cuts and stimulus, but calls will grow for the German government to also deliver fiscal stimulus.
Oil
Oil prices could see some short-term support on expectations we will see a short period of calm with the trade war and as both inventory draws in the US along with OPEC’s cuts will deliver tightness to the oil market. The longer-term outlook, deeper into 2020 however will likely see lower crude prices on global oversupply concerns.
Gold
Gold maintains a soft tone ahead of Fed Chair Powell’s Jackson Hole speech. The Minutes didn’t really do much to solidify growing dovish expectations for the Fed. The risks for a deeper slump with the US economy have increased since the last policy meeting and we should safe-haven demand be warranted by many investors.