Investors are looking to the monetary policy symposium in Jackson Hole, Wyoming next week for clues as to how rising U.S. COVID-19 cases may affect the debate over when to begin scaling back monetary stimulus, though concerns about the pandemic have prompted the Federal Reserve to move the annual gathering online.
Investors want to see signs that Fed officials are “willing to move with the newsflow and move with the evolution of the pandemic,” said Josh Wein, portfolio manager at Hennessy Funds, in a phone interview.
Monetary policy makers from around the world were set to gather in the Wyoming resort town for the Aug. 26 kickoff of the annual symposium hosted by the Kansas City Federal Reserve Bank.
But now the event, including a scheduled address on Friday Aug. 27 by Fed Chairman Jerome Powell, will take place virtually, after the Kansas City Fed late Friday said health conditions wouldn’t allow for an in-person gathering.
It comes after minutes of the Fed’s July policy meeting released on Aug. 18 showed “most” policy makers in favor of beginning to scale back the monthly purchase of $120 billion in Treasurys and mortgage-backed securities before year-end, though “several” thought the move should wait till 2022. At the time, some policy makers also argued that the spread of the coronavirus delta variant should be a factor in determining the timing.
The minutes of the July meeting have heightened the focus on Powell’s speech, said Ian Lyngen, head of U.S. rates strategy at BMO Capital Markets, in an Aug. 20 note.
“Investors were previously seeking clarity in terms of the timing of tapering — much of which was offered by the minutes,” he wrote. “Now the emphasis will be on whether the latest COVID concerns have caused policy makers to meaningfully reconsider at which meeting to announce the reduction in asset purchases.”
However, investors don’t expect Powell’s remarks, or any other headlines that might emerge from the high-profile gathering, to spark big market moves.
The volatility skew remains relatively mild, said Garrett DeSimone, head of quantitative research at OptionMetrics (see chart below). The skew measures the difference between implied volatility for puts, which give the holder the right but not the obligation to sell the underlying asset at a set price by a set time, and calls, which confer the same right to buy the asset.
There are no signs via other options-related measures that investors are bracing for any big stock-market price moves as a result of the symposium, DeSimone told MarketWatch, in a phone interview.
That indicates investors are “treating Jackson Hole as a nonevent,” he said.
Regardless of what Powell or other central bankers have to say, developments around the spread of COVID will continue to be closely tracked.
While U.S. COVID cases, driven by the spread of the delta variant, have been on the rise since early July alongside a global increase in infections, market participants around the world took significant notice in the past week.
Global equities sold off, a move in part attributed to fears about the potential toll on economic activity and renewed supply-chain bottlenecks. In the U.S., the Dow Jones Industrial Average
shed 1.1%, for its biggest weekly decline since the week ended June 18. The S&P 500
fell 0.6%, while the Nasdaq Composite
Commodities markets suffered a brutal week, with the U.S. crude-oil benchmark
falling 9% for its biggest tumble since March. Metals prices, including iron ore and copper, often seen as a bellwether of global economic growth, fell sharply, along with agricultural commodities like corn and soybeans.
Treasury yields edged lower as investors bought government paper, and the U.S. dollar reasserted its safe-haven status.
A combination of events heightened investor attention to the impact of the coronavirus delta variant in the past week, culminating with the decision after Friday’s market closed to make the symposium a virtual event.
New Zealand’s central bank delayed a planned interest rate increase, which would have been the first post-pandemic rate hike by a developed economy, after a handful of COVID-19 cases prompted a renewed lockdown of the island nation’s economy.
The tumble for oil futures was blamed in part on weekly inventory data that showed a fall in U.S. gasoline demand with three weeks yet to go in the summer driving season.
A British study indicated the effectiveness of widely used COVID-19 vaccines against the delta variant waned over time and U.S. authorities prepared to administer 100 million vaccine booster shots this fall and winter.
Earlier this month, a measure of U.S. consumer confidence dropped to a pandemic era low, and surveys show Americans have become more concerned about the variant. Expectations that businesses would widely reopen offices in the fall are beginning to fade.
At the same time, economists say it isn’t clear whether the spread of the virus is likely to significantly cool the economy beyond what was already expected.
“Admittedly, there is a risk that virus fear leads some households to defer or completely forgo some of their spending plans,” wrote economists at Oxford Economics.
“High-frequency data already point to softer demand in early August with hotel occupancy, credit and debit card spending, and restaurant bookings all losing momentum. But aside from the delta wave, cooler demand ought to be expected going forward given we’re passed the peak growth phase of the recovery,” they said.
Dallas Fed President Robert Kaplan, one of the most vocal proponents for beginning and finishing the tapering process early, said Friday that he would be open to changing his thinking if evidence emerges the spread of the delta variant is slowing the economy.
Hennessy Funds’ Wein said that if Fed officials do offer market-moving comments during the symposium next week, it’s more likely that they will acknowledge the risks posed by the delta variant. If so, stocks would be likely to rally given the implication that a tightening of monetary policy may be delayed.
“I think cooler heads will prevail,” he said.
While Jackson Hole takes center stage in the week ahead, investors will get a look at a range of U.S. economic data. Purchasing managers index readings for the both the manufacturing and service sectors for August are due Monday, with data on July durable-goods orders due Wednesday, and a revised look at second-quarter gross domestic product on Thursday.
On Friday, the Fed’s favored inflation measure, the personal consumption expenditure inflation gauge for July, is due for release along with personal consumption and spending figures, July international trade data, and a final look at the University of Michigan’s August consumer sentiment reading.