All Eyes On Jackson Hole

With this being one of the last Friday’s of the summer vacation season, we can probably expect trading volumes to remain light today. But make no mistake about it; all eyes will be on Jackson Hole this morning where both Janet Yellen and Mario Draghi are slated to speak.

The key here is that Fed Chairs have made a habit over the years of foreshadowing what is to come next in terms of monetary policy. And with changes anticipated both here and across the pond, logic would suggest that both Yellen and Draghi could use this event to let the world know when those changes are expected to occur.

Here in the U.S., the topic at hand is the Fed’s balance sheet. With the Fed’s holdings having exploded from less than $1 trillion in 2007 to more than $4.5 trillion today, the key question becomes, when will the FOMC start selling some of their holdings? Currently, the short answer is soon. As in very soon. As in next month.

Many analysts believe that Janet Yellen has already telegraphed the move. So, traders will be listening for confirmation this morning. If Ms. Yellen does indeed tell us that balance sheet reduction is set to begin at the September meeting, I wouldn’t expect much reaction from the market. However, if she waffles, or talks about the FOMC remaining data dependent, then volatility could pick up – in either direction.

On one hand, traders could take a delay in balance sheet reduction as a positive because it means rates are likely to stay lower for longer. However, this could also be taken as a sign that the Fed sees weakness in the economy. At this stage of the game, with stock market valuations where they are, this could be a problem.

On the other side of the Atlantic, the Europeans are behind the Fed’s curve at this stage of the game. Super Mario’s gang is still printing money via their QE scheme and as such, the question is, when will the stimulus end? The Eurozone economy has surprised to the upside this year and inflation has improved. Thus, the end of the QE program could occur ahead of schedule and traders will be listening intently today for any hints thereof.