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EM investors hope for help in Jackson Hole

EM investors hope for help in Jackson Hole

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Teaser: From Friday to Sunday, many of the world’s important central bankers meet in Jackson Hole, where the opening speech is awaited with excitement in the financial markets.

This year’s most important event for central bankers takes place from Friday to Sunday this week. Once again, the U.S. Federal Reserve Bank’s branch in Kansas organises the annual returning symposium for the world’s leading central banks and special invited guests.

They meet in the beautiful Teton County, or more specifically, in Jackson Hole, Wyoming. It’s not every year that the symposium attracts equal attention, but this time it is already announced that Jerome Powell holds the opening speech. As chairman of the U.S. Federal Reserve Bank (Fed), his speech attracts the attention of the entire financial market – none the least because a number of Emerging Market countries are feeling the pressure from the tighter U.S. monetary policy.

The main theme of the symposium is the macro-economic impact from global super-companies where I trust that the focus is on companies built on IT infrastructure and efficiency, such as Amazon.com and similar corporations. However, the financial markets short-term focus will be on other elements in the opening speech from Jerome Powell – so what will he say?

My best bet is that he will communicate with the financial market because it is the style at Fed. However, I also expect that there will be a reaction towards President Donald Trump and his attention to the value of the greenback, as the coming interest rate hikes could send the dollar higher leading to more tweets.

The hints that I would look out for in Powell’s speech are certainly indications about whether the future interest rate hikes are on track as expected, or not. Everyone in the financial markets expect another hike on interest rates by 0.25 percentage points in September, and so do I.

If one uses the future’s contracts as an indicator, then 62 pct. of the market is positioned for another hike in December. I have long advocated for more rate hikes in the U.S. and I see no reason to change this view i.e. I would also go for the December hike. The recent hikes from the Fed and the expectation is shown in graphic one. This scenario might, as mentioned, trigger some tweets from the White House, but I have a belief that Jerome Powell has the strength to stay on the chosen path.

It’s a good question whether the actual rate hikes, a stronger dollar, or tightening of dollar liquidity in the financial system is the most critical for Emerging Market countries. But many Emerging Markets investors will listen very carefully to Powell’s words. Comments concerning the reduction of Fed’s balance sheet will be of interest, as it affects the dollar liquidity around the globe. Investors will probably also pay particular attention to whether the growing financial problems for a number of Emerging Markets countries could change the expectations from graphic one.

Fed has prior decided to let international financial turmoil influence their interest rate decisions, but my best assessment is that this is not the case yet. So far, the crisis includes a smaller number of countries, and if a hard assessment has to be done, these countries have lived high on cheap liquidity without having their own fiscal household cleaned-up. This does not give much respect at the world’s most powerful central bank, which is another reason why it is unlikely that Fed gives these circumstances special weight. In addition, the central bank also needs to take USA’s own situation into account.

Firstly, the United States has conducted monetary intervention via the quantitative monetary policy. Almost every time, intervention is an extreme act in a financial market, so it makes sense just to use this solution for a short time.  Otherwise, it will influence the pricing of financial assets. We have witnessed this for a number of years now and just for that reason, Fed is busy pushing up the interest rates again. In addition, the U.S. economy is growing robustly, where a responsible central bank like the Fed, will counterweight increased government spending by simply tightening the monetary policy like hiking interest rates. These two elements, I regard as classic arguments for further interest rate hikes in the United States. But I expect the chairman of the Fed to have more on his heart than just comments to satisfy the financial markets’ never-ending hunger for new information.

As mentioned initially, the main theme is how big global companies affect the national economies. I would expect Powell to address this theme, however, investors will not respond to this part of his speech in the short term, but nevertheless, the topic is strategically very interesting. Several companies start to grow very big, as graph two shows, an example of where Apple is compared with selected countries.

Both Fed and Powell have previously stated that they are puzzled by the historically strong job market that so far hasn’t generated any wage inflation. I agree that global super-corporations play a role as they create global production platforms where they internally can allocate the tasks to the locations that currently are the cheapest, which in turn contributes to global wage competition.

For consumers, the globalisation also has generated a long-lasting advantage. The internet itself, but also the many e-commerce platforms, mean that it is difficult for retailers to raise prices on many consumer goods. All-in-all, managing national monetary policy in such a globalised world can give a central bank challenges, and it would be exciting if Powell comes across this subject.

The whole symposium is surrounded by the usual secrecy as it is unknown who participates, and the list of speakers is published only Thursday evening at 8 PM New York time.

The big clout however, is Powell’s opening speech on Friday at 10:00 AM local time in Wyoming, which also is 10 AM New York time. It’s around the closing time in Europe, but Wall Street is always ready. This time, I think the symposium is extraordinarily exciting, but I do not expect it to be very comforting for the Emerging Markets countries.

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