Central bank viewing overview:
- Roadmaps suggest that a gradual announcement is coming soon – just not necessarily at the Federal Reserve’s Jackson Hole Economic Policy Symposium.
- The spreads between the Eurodollar contracts and the US Treasury yield curve are both behaving in a way that is in line with the soon to be curved central banks.
- Fed interest rate hikes have risen and remained high since July FOMC minute release, which explicitly distinguished between narrowing and tightening.
Jackson Hole in Sight
In this issue of Central Bank Watch, we do review last week’s speeches, as well as the various Federal Reserve policymakers ahead of the Jackson Hole Economic Policy Symposium in the coming days.
More information on central banks can be found on the website DailyFX central bank release calendar.
Tip for taping
Hot labor market reports and inflation indicators have created a staged federal reserve in the coming months. FOMC policymakers seem to agree to the extent that the tone of last week’s comments has met the market’s need to provide clear guidance before the forthcoming policy changes.
August 12 – Daly (President of San Francisco) said that the FOMC could start reducing its waiver by the end of 2021.
August 15 – commented on Kashkar (President of Minneapolis) “iIf we see another job report, like the one we just got, I would feel comfortable saying yes, we have – maybe – we may not have filled that hole completely – but we have made a lot of progress, and now is the time to start restrict the purchase of assets. “
August 16 – recommended by Rosengren (President of Boston) “iIf we get another strong labor market report, I think I would support announcing in September that we are ready to start a reduction program. “
August 18 – The FOMC minutes will be published in July, stating “vparticipants commented that economic and financial conditions are likely to call for cuts in the coming months, “and” several others noted, however, that a slowdown in asset purchases is likely to become more appropriate early next year. “
August 20 – Mr Kaplan (President of Dallas) cautioned that his position could be narrowed rather than sooner rather than later if problems with the delta option continued.
August 25 – George (President of Kansas City), on delta options, “I don’t think it will change my own calculation that it is time to start making these adjustments, given the achievements so far.”
All eyes (and ears) on Fed Chair Powell
As the expectations of the Federal Reserve’s Jackson Hole Economic Policy Symposium formed, “say” arose: the event has become personally virtual. And at the same time Fed Chairman Jerome Powell’s speech in Jackson Hole is vaguely titled “Economic Outlook”, which is due to take place on Friday, August 27 at 10 a.m. EDT / 14 GMT, the fact that the Fed has changed the format to a virtual event indicates that they are concerned about the delta variant, a hint that they may wait a little longer before the official announcement is announced.
The bond market is waiting for Hawkish Powell
We can measure whether a Feeded the interest rate is estimated using Eurodollar contracts, examining the difference between the borrowing costs of commercial banks over a certain period of time in the future. Figure 1 below shows the difference in borrowing costs – the margin In September Agreements for the year and by December 2023 to assess where interest rates will move in the interim period In September 2021 and December 2023.
Spread of Eurodollar futures (September 2021-DECEMBER 2023) vs. US 2s5s10s Butterfly: daily rate chart (August 2020-August 2021) (Figure 1)
By comparing the Fed’s interest rate hikes with the US Treasury’s 2s5s10s butterfly, we can assess whether the bond market is operating in a manner consistent with 2013/2014, when the Fed announced its intention to tighten its QE program. The 2s5s10s butterfly measures non-parallel shifts in the US yield curve, and if the history is accurate, this means that intermediate interest rates should rise faster than short-term or long-term interest rates.
Given that the Fed’s rate hikes have largely changed since the FOMC’s July minutes, which explicitly stated that there are differences between austerity and tightening, the US yield curve is moving in a way that suggests that the Fed is on the horizon (but not necessarily this week). ).
By the end of 2023, the interest rate rebate will be 94 basis points — that’s three rises plus a 76% probability of a fourth 25 basis point hike — and the 2s5s10s butterfly has risen to its highest level since the Fed lowered the debate in June. However, in line with recent chatter from FOMC officials, the first interest rate hike appears increasingly likely to arrive at the end of 2022.
Federal Reserve Interest Rate Expectations: Fed Funds Futures (August 26, 2021) (Table 1)
It will be recalled that before the July FOMC meeting, December 2022 was the most favorable month for the first exchange rate change, with a probability of 68%. Even if Fed chairman Powell does not appear to make a restrictive announcement at the Jackson Hole economic policy symposium, traders are optimistic that the U.S. economy will continue to progress, allowing the Fed to announce its intention to cut soon, perhaps at the FOMC meeting in September. As a result, interest rate markets now have a 92% probability that the first interest rate hike will occur in December 2022.
IG Customer Mood Index: USD / JPY Interest Forecast (August 26, 2021) (Figure 2)
USD / JPY: Data from retailers show that 47.40% of traders are online, with a ratio of short to long traders of 1.11-1. The number of traders is 1.66% higher than yesterday and 0.44% lower than last week, while the net short of traders is 5.20% higher than yesterday and 19.08% higher than last week.
Traders have even less money than yesterday and last week, and the combination of the current mood and recent changes gives us a stronger appreciation against the dollar / yen.
– Written by Christopher Vecchio, CFA, Senior Currency Strategist