The following are major banks' expectations for today's speeches by Fed Chairwoman Janet Yellen and ECB President Mario Draghi at the Jackson Hole Symposium.
BNP Paribas (PARIS:BNPP): ECB President Draghi’s Jackson Hole speech late this evening (18:30 GMT) could, in our view, be just as important as that of Yellen. ECB communication since the June policy easing package has clearly signalled that the ECB believes that those policy measures will be sufficient to eventually bring inflation in line with target. However, the sharp drop in inflation expectations in recent weeks signals that markets fear the ECB is already behind the curve. Thus, although our base case scenario remains for no change of ECB stance, an unexpected shift in message (similar to the ‘whatever it takes’ speech in London in July 2012) cannot be ruled out. At the very least we suspect Draghi will be cautious not to stand in the way of the recent depreciation in the EUR, which in the eyes of most Governing Council members probably remains preferable to QE as a means to move inflation closer to the objective...
FX markets are trading more cautiously going into the Jackson Hole symposium, anticipating that Janet Yellen’s comments (2pm GMT) will assume a more dovish tone compared to the FOMC minutes. The US dollar struggled to extend its gains on Thursday despite solid US economic data. As our US economics team highlights, the broad topic of her speech entitled “Labour Markets” is likely to focus on those indicators that have led the Fed to point to an underutilization of labour resources in in the latest FOMC statement. As long as this key message remains intact, we continue to see asymmetric risks to rates, namely the scope for an upward adjustment in front-end yields to any hints of hawkishness in Yellen’s remarks is larger than the downside in reaction to the (widely anticipated) dovish tone. Thus, we favour holding on to USD longs and maintain our long USD/JPY and short EUR/USD trade recommendations.
Credit Suisse (NYSE:CS): Fed Chair Yellen and ECB President Draghi are scheduled to speak on at 10 a.m. and 2:30 p.m., respectively. Under different circumstances, this year's Jackson Hole conference might have presented Yellen with an ideal opportunity to clarify the FOMC’s policy strategy given the progress made toward its full-employment objectives. Perhaps she would have struck a less dovish tone, preparing the verbal groundwork for an eventual reduction in policy accommodation. But the threatening geopolitical backdrop, the soft patch in European economic data, and the corresponding fragility in risky assets may constrain Yellen's rhetoric. She likely would prefer to make no waves in the financial markets next week. In our view, domestic data will regain meaningful repricing power for US rates in the first week of September. In the meantime, we expect the low vol environment to persist, and European data and Draghi’s speech will likely be more relevant for intermediate- and long-end US rates. While we remain fundamentally bullish on the USD and continue to like EUR/USD downside, we are a bit cautious on the broad USD rally heading into today’s Jackson Hole comments, given our call for limited additional news from Fed Chair Yellen.
Mario Draghi’s address at Jackson Hole will be in the spotlight, with the market focusing particularly on any possible comments of the ECB President on the recent weak array of EA data and its possible implications on policy. From an FX standpoint, ECB President Draghi’s comments from Jackson Hole will be key. We are structurally bearish EUR and continue to look for it to move lower against USD and CAD.
Deutsche Bank (NYSE:DB): So what can we expect from Yellen? Our US economists expect the Fed Chair to provide us with an updated assessment on the infamous ‘Yellen dashboard’ in evaluating the ongoing labour market slack and how they have yet to normalise relative to 2002-2007 levels. Some of these alternative measures she monitors include duration of unemployment, quit rate in JOLTS data, labour force participation etc. Any sound bite that touches on the debate of cyclical versus structural drivers of labour force participation will also be closely followed. Unlike some of the previous Jackson Hole symposiums, this is likely not one that will serve as a precursor of any monetary policy changes but the tone of Yellen's speech may still have a market impact and set the mood for busier times ahead in September. Given markets are seemingly expecting nothing but another dovish display from Yellen the risk is perhaps skewed to the other side.
ING (NYSE:ING): Yellen’s speech at Jackson Hole this Friday is titled simply “Labor Markets”, within the broader conference theme of “Re-evaluating Labor Market Dynamics”. Previous Jackson Hole speeches have been credited with scene shifting comments from previous Fed chairs, and the occasion does provide the opportunity to start the ball rolling for a policy shift. After all, monthly payrolls increases are averaging a fairly steady 245k on a three-month rolling basis, the unemployment rate has fallen to 6.2%, coming as low as 6.1% in June. Broader measures of unemployment are also sharply lower, quits have risen for five consecutive years, the proportion of unemployment that is over six months has fallen from more than 60% in 2010 to 47% now, and about the only thing that has not shown signs of clear improvement is wages. We suspect that it is this wages element that Yellen will focus on, using that as a justification for the pedestrian pace at which the Fed has been moving towards an end to QE and normalisation of monetary policy. And as such, the speech is not likely to tread much new ground in terms of the Fed stance at forthcoming meetings. Furthermore, with no Wall Street economists attending Jackson Hole this time – the audience will be mainly academics and central bankers – Yellen can keep her comments on a theoretical plane, and side step practical policy setting. One thing that occurs to us is that in real terms, wages growth is not all that unusual. Pre-crisis, wages growth was about 3.5%, but then so was headline inflation. Now, headline inflation is about 2.0%, so are wages. In both instances, real wages growth was about zero. So can wages growth increase without a concurrent increase in headline inflation, or is an increase in wages growth a prerequisite for inflation to rise? Or both? Maybe Yellen can shed some light on this…
Commerzbank (XETRA:CBKG): What is Ms Yellen likely to say today? First of all, remember that Ms Yellen has repeatedly dampened enthusiasm about the recent, good labour market data. She has pointed to the lower participation rate and high long-term unemployment. If she does so again today, thus putting the encouraging labour-market reports of the last few days into perspective, her speech might be regarded as more dovish than the minutes and weigh on the dollar. If, however, she over-emphasises the weaknesses, she might be increasingly perceived as an outsider in the FOMC, particularly since it is difficult to follow her reasoning. Both the participation rate and long-term unemployment are phenomena which a central bank cannot influence in the short term by providing a bit more or less liquidity. That is directly evident if we look at long-term unemployment. The reasons for long-term unemployment in the US are probably similar to those in Germany. Most long-term unemployed have no job because they have not completed their education (that is the case for two-thirds of them) or because they have health issues. Obviously, the central bank cannot do anything about that. One might assume that participation increases if the labour market conditions improve. However, the participation rate is obviously not affected by cyclical factors; in fact, it has been declining since 2000. Once again, short-term liquidity measures by the central bank will have no effect on this trend. Overall, the market appears to be very cautious ahead of Yellen’s speech. Some of those who held USD long positions before have probably taken profits since yesterday. That those who missed the USD strength so far jump on the bandwagon now appears quite improbable.
ECB President Mario Draghi will give his speech about four hours later than Ms Yellen. He will not be able to say many positive things about the European labour market. Unemployment seems to just have peaked recently. Inflation, too, appears to be moving away from the ECB’s target. The risk that the ECB takes QE measures after all has risen further in the last few months. If Draghi so much as hints at such steps, the euro will be in for a difficult time ahead of the weekend.
Bank of America (NYSE:BAC): In the spirit of the more academic focus of Jackson Hole, we expect Yellen to give a graduate seminar on the size, sources and slow improvement in labor market slack. That said, the risk to the markets is that Yellen also acknowledges the better-than-expected labor market data, and her comments are seen as less dovish than the markets currently appear to anticipate. Thus hawkish mis-readings of her remarks remain a risk, but we don’t expect any signals of a materially earlier exit from her.
BTMU: As we have stated before we do not expect Fed Chair Yellen’s speech on the labour market today to a signal a shift in Fed monetary policy rather she is more likely to reiterate her view that labour market conditions continue to improve but that there is still significantunderutilisation of labour market resources allowing the Fed to maintain loose monetary policy.
Investors will also be focused on speeches from ECB President Draghi and BoJ Governor Kuroda at Jackson Hole especiallygiven that expectations for further monetary easing from both central banks have been increasing in the near-term weighing on both the euro and the yen. Again we don’t expect either ECB President Draghi or BoJ Governor Kuroda to signal a shift in monetary policy stance although the likelihood is higher that ECB President Draghi could provide a signal that further stimulus is on the way posing some downside risk for the euro today
Credit Agricole (PARIS:CAGR): The theme of this year’s Jackson Hole economic symposium is labor market dynamics—a key issue for Fed policymakers. Though the July FOMC minutes had a more hawkish tone and debate on the timing of the rate lift-off appears to be intensifying, significant labor underutilization was highlighted. Chair Yellen remains keenly focused on the labor market given the Fed’s mandate and the FOMC belief that “a range of labor market indicators suggests that there remains significant underutilization of labor resources.” Persistent labor market slack (despite a quicker-than-expected decline in the official unemployment rate) and low inflation suggest it is appropriate to maintain accommodative monetary policy for some time to support above-trend growth that will lead to greater utilization of labor resources. We believe Ms. Yellen will continue to offer support for this view and do not anticipate any hawkish surprises from her comments (delivered Friday morning at 10EDT). The research presented (program available Thursday evening) will likely address both analytical and empirical aspects (demographic, structural and cyclical) of current and prospective labor market changes and their impact on wages, inflation, potential growth, etc.
Danske Bank (COP:DANSKE): Focus will be on Janet Yellen's speech in Jackson Hole at 16:00 CET. Yellen speaks on the subject of the labour market - the key component to the timing of the first rate hike. However, Yellen has spoken extensively on this subject before and it is hard to imagine she can come up with much new given how much time the Fed has spent on analysing this area. Yellen's view is clear - that there is still significant slack in the labour market, which is backed up by very moderate wage increases. According to the minutes of the latest Fed meeting, many members expressed that the Fed might soon change the description of the underutilisation of labour. If Yellen comments on policy at all, she is likely to repeat the phrase from the semi-annual testimony that if the labour market continues to improve faster than expected, the risk is that the first rate hike could come sooner than currently projected.
ECB-president Mario Draghi will speak at 20:30 CET in Jackson Hole after market close in Europe. It is unclear to what degree he will stick to the labour market theme that at the moment is less decisive for monetary policy in the euro area.
SEB: Later today Fed's Yellen will talk about the labor market at the Jackson Hole conference. Investors will be looking for clues on the timing for higher interest rates, but the expectations are that the tone will be a little more dovish, balancing out the slightly hawkish statements from the Fed minutes. Yellen is still repeating that the labor market, despite lower unemployment, hasn't come to where it needs to be.
While Yellen is dwelling on the timing for a rate hike Mario Draghi is coming under increased pressure to do more to stimulate growth and reduce the risk of deflation. Draghi is likely to continue to blame the lack of political reforms for the lagging Euro-zone growth, but declining inflation expectations suggests that ECB eventually will have to introduce QE.