Jackson Hole week is often used as a policy bull horn
It is clear that the market is taking some froth off the top of several recently over-bullish areas (everything from Palantir/AI to MP Materials/REE are taking haircuts) and it is doing it with fear of the Fed as rationale. This could paint the current market turbulence in these and other areas as brief, depending on what comes out of the Fed’s orifice at week’s end.
The Fed has traditionally used this getaway as a pulpit from which to hint about coming policy. With slipping economic signals (everything from employment to commercial real estate) continuing apace, I don’t think that the inflation jitters instigated by last week’s PPI report will stack up against the decelerating economy. That report was not inflation, after all. It was the effects of fiscal (tariff/trade) policy.
This article summarizes the Fed’s Jackson Hole situation of 2024 vs. 2025.
Powell has used Jackson Hole to battle inflation and buoy jobs; he’s now caught between both
The article discusses the signs of slowing growth that our market based indicators have been point to for at least a year now (the economic deceleration was slowed in 2024 as the Biden administration did all it could through fiscal policy to try to get itself reelected).
If Trump would stop insulting and badgering “always late” Powell for a couple minutes, he might just get a Fed chief on the cusp of going overtly dovish. The economy is decelerating and inflation signals are not a problem, currently. Again, what “inflation” exists are the effects of fiscal policy. The last real “inflation” problem was birthed in 2020 when both Fed (monetary) and government (fiscal) went balls out to blow the policy gasket.
My take is that the Fed is going to release the doves on Friday, or shortly thereafter. Especially so if markets remain weak or drop further in fear of the Fed. We (NFTRH) have been anticipating an interim (temporary) decline in long-term Treasury yields, and yield curves continuing to steepen. The implications of that would be the opposite of inflationary, which not surprisingly the herds are focused on.
To review, it is not the often (media) touted inversion that brings a recession. It is the subsequent curve “steepener” that does the job. Especially when said steepener is under deflationary pressure. Yield curves can steepen under inflationary or deflationary pressure, depending on what nominal yields are doing. In this case, temporarily I expect declining nominal yields.
The 10yr-3mo curve in the lower panel is more Fed-dependent than the 10yr-2yr, which is leading it. Yet the 3 month curve is in a moderate steepening stance. It lays in wait for a coming Fed rate cut.
If the market does bounce back on dovish relief it will be celebrating a weak economy that is finally confirmed by Fed policy. That will start the clock ticking on a real stock market correction or bear market, since historically it is around (+/- several months) the time of a Fed rate cut that bear markets tend to begin.
Meanwhile, it would be just like this market to celebrate a vanquishing of yesterday’s problem. That would be the inflation problem that is still much more front of mind than any sort of deflationary or market liquidity issue. See this NFTRH excerpt, in which I included Google search data about inflation and deflation, among several other economic/market indications.
