Dovish sentiment prevails at Jackson Hole
Corporates | Kennett Square, PA
The Jackson Hole Economic Symposium took place last Thursday and Friday under the backdrop of an improving employment environment but with continuing concerns about the spread of the Delta variant. Fed Chair Powell’s dovish comments led to a softening of the dollar and slight drop in rates following his announcements. Commodity prices continued to rise throughout the week due to supply constraints.
Since 1978, prominent central bankers, finance ministers, academics, and financial market participants have convened in scenic Jackson Hole to discuss monetary policy. Emblematic to the current challenges facing the economy, the event was moved virtual for the second consecutive year as uncertainty caused by the Delta variant continues to fester. Preceding the symposium this year, market watchers speculated whether Chair Powell would divulge any details regarding the impending tapering of the Fed balance sheet. The Fed indicated they are likely to begin reducing bond purchases as the labor market continues to improve. The unpredictability of the Delta variant and lack of internal consensus within the FOMC caused anticipation of any major tapering announcements to dissipate in the days before the conference. Ultimately, Chair Powell maintained that tapering is likely to begin by the end of this year and that tapering decisions should be viewed independently of interest rate hikes. The November FOMC meeting remains the most likely timing for a formal announcement. Chair Powell’s remarks also laid out the dovish case for inflation, presenting the argument that inflation was likely to be transitory and in line with their objectives for the long run. The 10y Treasury rose steadily this week on the announcement of full FDA approval for the Pfizer vaccine and renewed calls from St. Louis Fed President James Bullard to begin tapering. Rates fell slightly following Chair Powell’s remarks on Friday to close the week at 1.305%.
(Related insight: Read, "Recapping Powell's Jackson Hole 2021 Speech")
Dollar strength softens following Powell’s remarks
The U.S. dollar remained steady this week as the market awaited signals from the Jackson Hole conference. The terrorist attacks in Afghanistan and more hawkish comments from FOMC members briefly bumped the dollar higher entering Friday morning, but those gains were quickly erased by Chair Powell maintaining a fairly dovish stance in his remarks. The dollar fell to its lowest level since mid-August following his speech.
(Related insight: Read “Six key steps to implementing an operational FX program”)
Aluminum hits record high
Last Friday, aluminum prices jumped to $2,658/ton, the highest price since April 2018. The surge was driven by curbs in production in China. A heightened focus on controlling emissions led to a 10% output cut among the five major Chinese smelters in Xinjiang during the first seven months of this year. Additionally, a major fire at an aluminum plant in Jamaica further raised concerns of supply constraints. The price of steel has also consistently posted record high prices this year as China seeks to keep production at 2020 levels. Steel prices rose 87% this year to $1900/ton after averaging $600/ton during 2019, before the pandemic. Oil also rallied last week fueled by the weakening dollar as well as concerns over the impending storm in the Gulf of Mexico.
The market will focus on August employment numbers, which the U.S. Bureau of Labor Statistics will release on Friday. The tapering discussions at the next FOMC meeting will depend heavily on whether the trend of positive job reports continues. Hurricane Ida has not substantially impacted oil prices to date, but the market will closely monitor how quickly offshore production and refineries return to full capacity.
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