Eyes on Jackson Hole

MACRO FRAME

Fiscal dominance has returned to the market, though underlying concerns over the deficit and debt burden are driving investors to demand more risk premium in an environment with persistent inflation. Meanwhile, yields have broadly taken a backseat to equity market performance as corporate earnings growth and expectations have set up bullish conditions to continue through the remainder of the year.

STOCK INDEX FUTURES

Equity index futures were mixed overnight, with tech leading gains after Nvidia’s earnings materially strengthened the case for the AI infrastructure cycle. Nvidia reported fiscal Q2 revenue of $96.2 billion, up 18% sequentially and 106% YoY. Data Center revenue was $89 billion, bout 92–93% of total sales, and rose 117% YoY. Fiscal 2028 revenue was guided to grow about 70% YoY, as the company expects demand to outpace supply. Memory-component shortages are the key bottleneck. This could cap the pace of industry expansion, but it also reinforces the case for ongoing demand across memory, storage, networking, and data-center infrastructure. Attention now shifts back to macro environment ahead of the Fed’s Jackson Hole Symposium and after July PCE showed headline prices coming in above forecasts at 0.2% MoM and 3.7% YoY. Core PCE rose 0.2% MoM at 3.3% YoY reaffirming still-firm inflationary pressures. Near-term rate hike expectations are little changed in response to the report (35% chance of hike in September), despite second estimate GDP growth revealing other firm inflationary pressures in real final sales to private domestic purchasers was revised up to 4.2%, while the GDP-based PCE deflator and core PCE deflator were revised higher to 5.3% and 3.6%, respectively. Taken together, these reports are hawkish and likely to affirm views on the FOMC board that policy should move upwards.

CURRENCIESUS DOLLAR: The USD index is little changed at 99.20, finding fresh support following July’s PCE and ahead of Fed remarks in Jackson Hole. Also supportive of the dollar is revised Q2 GDP data, which affirmed inflationary pressures in the economy and showed that the US economy continues to outpace other major economies. Still, near-term pricing for a September rate hike has little changed, which is likely keeping a cap on the dollar’s upside. In order for the dollar to continue materially break higher, money markets will need to shift near-term rate hike expectations back in favor of September. Broadly, the dollar is still under pressure from moves to diversify away from the currency amid worries the deficit, reflected in yields at the long end of the curve. The Treasury’s move to put a bottom on prices also  means that the dollar is likely to be under pressures because if bond prices cannot move lower naturally, the foreign exchange price of owning US debt will price it out via currency depreciation.

Watch point: The market remains doubtful over a September hike, though the risk of a move upwards in policy should not be discounted given the current inflationary backdrop.

EURO: The euro is little changed at $1.1641. Little data out overnight as markets focus in on the Fed’s symposium for any clues on the policy path. Given that a September hike is being taken as a sure thing by markets, any hawkish shift in pricing toward the Fed will be favorable to the dollar. The Reuters report that ECB policymakers are ready to raise rates at the September meeting did little to move the euro or increase expectations of a September hike. What was notable is that the report said policymakers will signal little intent to further rate hikes. Money markets are pricing around 44 bps of tightening this year, if policymakers suggest they are comfortable with the new rate, then the euro is likely to lose further support against the dollar. Given that the eurozone economy has proved remarkably resilient and that natural gas prices are driving up energy costs, the base case for September is that the ECB will hike rates with little worry of negative effects to the economy and would otherwise suggest the bank is in the position to raise rates further.

Watch point: Broader price direction will be subject to Fed-ECB policy expectations, which is likely to be favorable to the EUR in the near-term.

BRITISH POUND: Sterling is little changed at $1.3582. A quiet night for UK data, the market will focus on the Fed’s symposium in the wake of PCE data. Recent economic data has been positive and up until recently kept market expectations of at least one Bank of England rate hike in place. However, markets have reduced tightening expectations from the BoE and are no longer fully priced for a hike by year-end, seeing 24 bps of total tightening. Recent labor data pointed to a broad cooling in hiring and wage pressure. Attention will also shift to parliament resuming session next week, where traders will look for signals on how the Burnham administration is likely to fund certain policies, ahead of the October budget.

JAPANESE YEN: The yen is little changed at 159.43 yen per dollar. Bank of Japan Deputy Governor Ryozo Himino said timely rate hikes would help avoid an inflation spike, but stopped short of signaling an imminent rate hike. Himino’s remarks were hawkish at the margin, though the absence of a clear intent to raise rates in September could see the yen come under renewed pressure. Markets are pricing a 64% chance of a September hike. July’s meeting minutes revealed more urgency to raise rates, but a failure to validate market expectations of a September hike could renew pressure on the currency and send the yen back toward the 160 area. Stronger near-term rate hike expectations have kept the yen from sliding as fast as it had been earlier in the summer, though existing fundamental pressures remain. Mounting unease over Japan’s fiscal outlook has kept JGB yields elevated without offering the yen support, highlighting market worries over the debt-load.

Watch point: Failure to raise rates at the Bank of Japan’s meeting could see the yen drop toward the 160 level.

AUSTRALIAN DOLLAR: The Aussie is 0.35% higher at $0.7195, near a 3-month high as traders continue to add to expectations of a September rate hike following monthly inflation data, which showed prices rose 1.0% in July. Fresh data overnight showed that household spending rose 1.1% in July, suggesting strong consumer demand despite higher borrowing costs, adding further evidence of inflationary pressures to the economy after yesterdays CPI data. The most notable figure, however, was that trimmed mean inflation rose 0.5%, above expectations of a 0.3% rise, keeping the annual pace at 3.6%, where the Reserve Bank of Australia had been looking for a slowdown toward 3.3% by year-end. Minutes of the Reserve Bank of Australia’s August meeting showed that several members were pushing to hike rates, however, noted that upcoming data on inflation, jobs, and GDP ahead of September’s meeting would be needed to further assess the economy. Taken together, this has set up September’s meeting to be more lively than expected. Money markets now see a 57% chance of a hike at the September meeting vs. pricing of 40% on Tuesday and a 14% chance Monday.  Weak labor data has suggested some softness in the labor market, though the data is unlikely to weaken the RBA’s tightening bias heading into Q3 inflation figures.

Watch point: June’s hiring figures have offered some relief on inflationary pressures, though ongoing pass-through into broader prices is likely to be in focus in upcoming data.

TREASURY FUTURES

Yields are higher across the curve, with the rise most reflected in the belly. July PCE reinforces the view that inflation remains too firm for the Fed to not move higher on rates before year-end. Both headline and core PCE prices increased 0.2% in July, leaving YoY rates at 3.7% and 3.3%, respectively. While real consumer spending was flat, real disposable income continued to rise, limiting evidence of a material deterioration in household demand. The combination of subdued real activity and sticky inflation should keep policy easing constrained and supports a hawkish market reaction. The second estimate GDP figures leaves headline output growth unchanged at a moderate 1.5% annualized rate, but the details are inflationary: private domestic final demand was revised to a robust 4.2%, real GDI rose 2.2%, and PCE inflation was revised higher. The report therefore reinforces the message from July PCE that the economy retains enough domestic-demand resilience to keep inflation risks elevated and heighten expectations the that Fed should move upward on policy.

Elsewhere, the Treasury said it could use the Treasury General Account to purchase longer-dated bonds, which could lead to the scenario of that the market believes the Treasury is defending a price. That dynamic could see the market test of the Treasury’s move, leading the buyback operations to grow overtime. Bond prices likely to remain under pressure through the rest of the year as underlying problems of a rising deficit, massive debt load are driving an increase in risk premium despite efforts from the Treasury. Inflation expectations have been relatively contained, signaling that upcoming bond market volatility is likely to center around the political environment in the US and November mid-terms. Meanwhile, the addition of rising supply of corporate bonds and persistent inflationary worries set up conditions for yields to resume their uptrend. Markets are pricing a 40% chance of a hike next month and see 24 bps of total tightening by year-end. The  Jackson Hole symposium will see traders look for guidance over the recent climb in yields and for reassurance of Fed policy from the Trump administration. Failure to address near-term issues without any material plans from the Fed is likely to add to bond market unease.

Watch point: For Fed policy, without any forward guidance, the September decision will likely remain a close call.

Interested in more futures markets?  Explore our Market Dashboards here.