Stocks Want a Dovish Fed Chair Powell at Jackson Hole. They May Not Get Him.

The S&P 500 and the Nasdaq 100 are on pace for their biggest daily loss since the bloodbath on Aug. 5

• Stocks and bonds fell as the dollar rose before Powell speaks at the Jackson Hole Symposium.

• Markets fear the U.S. central bank will cut rates too late to contain the risk of recession.

• Wall Street may suffer if the Fed chair signals a 50bps rate cut is off the menu for next month.

Stock markets got cold feet ahead of a much-anticipated speech from Federal Reserve Chair Jerome Powell at the U.S. central bank’s annual symposium in Jackson Hole, Wyoming. The bellwether S&P 500 and the tech-oriented Nasdaq 100 equity benchmarks are on pace for their biggest daily loss since the bloodbath on Aug. 5.

Against this backdrop, the U.S. dollar is enjoying its best performance in three weeks relative to an average of major currencies and Treasury bonds thaare broadly lower as yields rise across maturities. These moves seem to reflect pre-positioning as traders brace for the possibility of a letdown from the Fed chief.

Markets fear the Fed is already too late to contain recession risk

The markets have been animated by the possibility that the central bank is already behind the curve on interest rate cuts—holding rates at their hiking cycle peak too long and risking a painful slowdown in economic growth—since early July. That’s when Powell hinted in congressional testimony that rising risks to job growth mean easing is imminent.

For their part, traders had been betting since mid-April that the Fed’s resistance to rate cuts in the first half of the year would demand catch-up stimulus in 2025. From that time through the end of June—notably before July’s fireworks—the total amount of rate cuts priced in through the end of next year nearly doubled from 75 to 133 basis points (bps).

A sense of urgency gripped investors once Powell signaled that Fed officials had reached their pain point, as though the central bank’s recognition meant the economic danger foreshadowed in the markets’ rate path pricing has been validated. That fueled speculation that September would bring a double-sized 50bps rate cut.

Stocks may fall if Fed chair waves off outsized rate cut

As it stands, Fed Funds futures pricing implies the probability of such an outcome at about 25%, while that of a standard 25bps reduction is set to 75%. Minutes from July’s meeting of the Fed’s policy-making Federal Open Market Committee (FOMC) seemed to endorse the latter, with a “vast majority” saying a cut is “likely to be appropriate.”

Nevertheless, “several participants” in the meeting said economic conditions provided a “plausible case” to have issued at 25bps rate cut in July, though this was ultimately shelved. Crucially, that meeting took place before the release of that month’s woeful jobs report and the follow-on turmoil across global markets.

With that in mind, it seems apt to consider that “several” dovish policymakers ready to cut rates in July may have turned into “many” or even “most” in retrospect. This makes a catch-up 50bps rate cut a viable possibility, and market pricing signals as much. If that is the path ahead, Powell’s Jackson Hole speech makes for an ideal stage.

On balance, the chair seems unlikely to ring alarm bells based on little more than one jobs report, even as he sets the stage for the start of an easing cycle next month. This may deflate risk appetite as bets on an outsized rate cut fizzle. That might weigh on stocks, lift the dollar and flatten the yield curve as more rate cuts are pushed off into the future.

Ilya Spivak, tastylive head of global macro, has 15 years of experience in trading strategy, and he specializes in identifying thematic moves in currencies, commodities, interest rates and equities. He hosts Macro Money and co-hosts Overtime, Monday-Thursday. @Ilyaspivak

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