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Jackson Hole may be a non-event for the markets

The markets seem to have caught the “Fed taper tantrum” flu bug after the release of the US central bank Fed’s monetary policy FOMC meeting minutes for July where most Fed officials agreed they could start to taper to reduce the pace of its current bond buying programme of US$120 billion per month.

Risk assets such as stocks and corporate high yield bonds reacted negatively post release of the Fed minutes. The US benchmark stock index, S&P 500 ended Wednesday session with a loss of -1.07% to 4,400, a 3-week low. Meanwhile, the SPDR Bloomberg Barclays High Yield Bond ETF shed -0.16% to 108.81, just a whisker above its key 200-day moving average at 108.65 where it has traded above since 28 September 2020. The negative sentiment has spilled over to Asia on Thursday coupled with the persistence regulatory overhang risk premium embedded in China big tech stocks that painted a sea of red on the benchmark Asia Pacific indices; Japan’s Nikkei 225 -1.10%, South Korea’s KOSPI 200 -2%, Hong Kong’s Hang Seng Index -2.1%, Australia’s ASX 200 -0.5%, Singapore’s Straits Times Index -1.4%.

The Fed last tinkered about tapering its quantitative easing programme was on 22 May 2013 when then-Fed Chair Bernanke made an unexpected statement about it during a congressional hearing that day. Risk assets reacted negatively trigged a sell-off in stocks, bonds and emerging markets; the S&P 500 recorded an accumulated decline of -7.5% (high to low) in the next five weeks ended 24 June 2013, emerging markets stocks tumbled by a larger magnitude of -17.7% over a similar period. In addition, the US 10-year Treasury yield spiked up by 61 basis points to 2.54% (bond prices drop when yields increase & vice versa). Hence, that’s how “taper tantrum” got its infamous definition in the marketplace.

Given such adverse and violent reactions seen in the financial markets, the Fed has learnt a lesson not to make or avoid any unexpected announcements on its QE asset purchase programme. Thus, it in the last two months we have witnessed a “parade” of prominent Fed officials from Vice Chair Clarida, Bullard, Bostic and Evans that have made public comments to support the start of QE taper as soon as possible before 2021 ends. These comments are well telegraphed to prep the markets ahead of the actual announcement on the start date of the reduction in asset purchases which suggests that the gist of the July’s FOMC minutes is not an “unknown” element. Therefore, the negative reaction seen in global stock markets on Wednesday may have overshot to the downside.

What is most interesting is the US Treasuries market does not react accordingly to the “taper tantrum” playbook. The US 10-year Treasury yield had barely move, unchanged at 1.26% and continued to trade below its 50-day moving average which suggests that its medium-term down trend remains intact since its 30 March 2021 high of 1.77%.

US 10-year Treasury yield

Still below 50-day moving average

Source: TradingView (click to enlarge chart)

As we know the next key risk event for the markets will be the Jackson Hole Economic Policy Symposium next week on 26 to 28 August where all eyes and ears will be on Fed Chair Powell speeches to scrutinise for hints on the start of QE taper. If there are any, the markets may not react adversely and violently as such “tapering expectations” have been well-telegraphed in the past month.

What is likely more important to risk assets at this juncture is the Fed starts to make its interest rate hike time table clearer and if Powell uses Jackson Hole to offer such guidance and if it differs from market expectations, a more pronounced reaction from the movement of risk assets is likely to occur. So far based on the CME FedWatch tool as at 19 August 2021, pricing from the Fed funds futures has indicated a significant probability of 19.4% and 30.6% for the first interest rate hike to occur after the FOMC meeting on 27 July 2022 and 21 September 2022 respectively.   

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