Fed’s Jackson Hole meeting is front-and-centre for global markets this week

The US Federal Reserve’s (Fed) annual Jackson Hole meeting looks set to dominate trade this week.

The DXY US dollar index already seemed to be looking ahead for some slightly more upbeat language on the US economy coming out this week as it rallied 0.4% on Friday. Fed Vice Chairman Stanley Fischer will have given added impetus to some of these US dollar moves after his speech on Sunday. Fischer was very upbeat on the outlook for the US economy stating that he expected investment to pick up imminently and that personal consumption expenditures (PCE) core inflation at 1.6% was within hailing distance of their 2% inflation target.

Given that materials and energy stocks did a lot of the heavy lifting for main stock indices globally last week, the prospect of a noticeable US dollar bounce this week could provide some headwinds for these recent gainers. The oil price, in particular, has had a massive rally, entering a technical bull market last week after rising more than 20% from its recent lows. How commodities fare this week in what could be a strengthening US dollar environment, could tell us a lot about the conviction behind the rally in a lot of spot prices.

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But Jackson Hole is a setting that is not designed for short-term market moves, in many respects it could not be further from participants’ minds. Much bigger questions will be debated about the efficacy of the inflation targeting regime. John Williams, president of the San Francisco Fed, made a speech last week foreshadowing some of the discussion topics. Williams argued that perhaps the Fed should target a higher level of inflation, say 3%, to give the Fed more room to cut rates in a future downturn.

These arguments reflect a growing feeling that the experiments with negative interest rates in Europe and Japan have not resulted in desirable outcomes. And also the calls for higher inflation targets mesh with growing calls that the Fed should be targeting nominal GDP rather than inflation. But these conclusions would also seemingly argue for greater fiscal stimulus in market downturns as well, something that is driven by the vagaries of elected officials and is unlikely to be ceded over to independent technocratic institutions such as central banks.

These discussions are not set to have an impact on Fed policy in the near term, but some of their implications could well fuel some volatility in markets this week. Janet Yellen’s speech on Friday will have the biggest impact on short term market moves, especially if she follows in Stanley Fischer’s relatively hawkish tone.

A week of talking up the US dollar will be good for US financial stocks that would benefit from a rate rise and some of that positivity could spread over into financials globally. But the big rally in resources-related stocks could struggle in a strengthening USD setting.

The ASX and the Nikkei were indicating that they were set to open lower after the end of trade on Friday. Currencies may well have a big impact on how stocks move this week with a lot of volatility for stocks with large amounts of foreign earnings.

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