Natixis IM: Garrett Melson on the upcoming Jackson Hole Symposium

18 augustus 2021

By Garrett Melson, Portfolio Manager at Natixis Investment Management

While last year’s Jackson Hole Symposium saw the Fed unveil its new Flexible Average Inflation Targeting framework, this year’s event is shaping up to be anticlimactic.

The topic that has remained front and center for the Fed for months has been tapering. Earlier this year many market participants were anticipating Jackson Hole would be the likely venue for Powell to announce taper plans. But there were two flaws with that view.

First Jackson Hole has rarely been a key market moving event. Yellen even skipped the meeting in 2015.

More importantly, however, Powell has been clear that taper plans would be telegraphed well in advance once the FOMC determined that substantial further progress has been made towards their dual mandate goals.

One by one Fed officials have begun to move the conversation towards tapering, but while Powell acknowledged progress has been made at the July FOMC meeting it’s hard to argue that one strong month of jobs gains after months of underwhelming prints supports a rapid pivot to checking off the box of substantial progress.

Brainard even explicitly stated she would need to see September jobs data first to judge whether substantial further progress had been achieved. Listening to the key voting members it’s clear Jackson Hole is unlikely to be the venue for that acknowledgement.

But all this talk of taper announcements misses the broader point – tapering is likely to inconsequential for markets. It matters really only to the extent that market participants think it matters. And even that is far lower than it has been in the past. Many have looked to the famous Taper Tantrum in 2013 and have projected similar fireworks this time around.

But that’s unlikely to be the case. Everyone knows it’s coming. Whether it’s been announced yet or not doesn’t really matter as it’s been known for months that it’s on the horizon. The Fed has been doing exactly what they said they were going to do. Giving plenty of advance noticed. Slowly pivoting towards taper with more time between announcement and a slow and measured taper actually commencing.

The actual impact of ongoing purchases is likely far smaller than many realize. Naturally the removal of that support should likely have limited impact as well. Again this time around conditions are very different from the prior tapering cycle. A robust and organic economic recovery is well underway and downside risks have materially fallen as the recovery has gained momentum.

The output gap, an admittedly nebulous concept comparing current economic activity to potential output of the economy is already back in positive territory – very different from 2013 when that gap was still nearly -4%. Additional support through asset purchases really isn’t needed with abundant liquidity and easy financial conditions as it is. Tapering is unlikely to change that.

And finally, the most important point to keep in mind with respect to tapering is that it is explicitly not a signal for the path of rate hikes. The only real link is that tapering is to be completed before rate hikes.

But completion of tapering does not mean that hikes will commence quickly thereafter. Even under the prior policy framework there was a considerable lag. The two policy levers follow distinctly different reaction functions – tapering requires substantial further progress while hikes require the achievement of the Fed’s price and employment goals – the latter of which is a much broader and more inclusive definition that in prior cycles.

The bottom line: Jackson Hole is likely to be a snoozer – just another edition of a long running symposium on long-term policy issues. Taper talk? Save that for a future Fed meeting. Perhaps some warning in September and announcement in November. It will happen when it happens.

So what does that mean for markets?

Rates markets have overshot all year – but robust foreign demand and domestic demand from pension and insurance companies has been a powerful technical factor pressuring yields lower on the back of fundamental fears of slowing growth on the back of the peak everything narrative and delta concerns.

Those technical factors are likely to keep a lid on upside moves, but robust growth which we expect to surprise to the upside of consensus expectations in the quarters ahead will likely bias yields higher.

We expect equity markets to continue to push higher on the back of this robust growth backdrop led by cyclical sectors that continue to have considerable runway.

Currencies have certainly been a difficult trade this year with plenty of crosscurrents at work. EM FX continues to battle COVID flare-ups on one hand as marginal central bank tightening, recovering global demand, and the evolving risk cycle pushes investors into non-USD assets place upward pressure on currencies.

In developed currencies the greenback continues to confound many as US exceptionalism plays tug of war with the risk cycle and recovering growth abroad. A continuation of the year’s range trade seems likely moving forward though firm support for the USD likely limits meaningful downside.