The S&P volatility term structure indicates that the upcoming Jackson Hole symposium may be the key catalyst for market movements this week, Barclays strategists said in a Tuesday note.
Concerns about the Federal Reserve potentially being “behind the curve” and the perception that risks are now more aligned with the employment mandate make both the symposium and the release of the FOMC minutes on Wednesday key events. Investors are seeking greater clarity on the new equilibrium policy rate and the trajectory to reach that rate, Barclays notes.
“Crucially, Jackson Hole has become more of a market-moving event in recent history,” the investment bank’s strategists said.
“Indeed, eyes will likely be focused on the speech by Chair Powell at 10am, EST, on Friday, August 23, where investors will look for clues on the path forward for monetary policy.”
Historically, Jackson Hole has typically been a non-event for equity markets, despite financial markets often going on high alert ahead of the event. However, there have been two notable exceptions: in 2019 and 2022, strong equity moves occurred.
The 2019 movements were likely influenced by trade tariffs announced shortly before the event, while the largest one-day move in the S&P 500 took place in 2022 after Powell’s hawkish speech, where he committed to doing whatever was necessary to bring inflation back to the 2% target, cautioning that higher rates could result in economic pain and increased unemployment.
Currently, S&P options appear to be pricing in a 75 basis point move, consistent with historical patterns.
Barclays strategists observe that, broadly speaking, assets have become more reactive to the Jackson Hole event. For example, across asset classes, the average volatility-adjusted move has been 1.7 times larger in the 2017-2023 period compared to the 2010-2016 period.
The bank’s economists expect Powell to express greater confidence that the conditions are set for a 25 basis point rate cut at the September meeting. Still, they believe he will avoid making any firm policy commitments.
They anticipate a 25 basis point cut in September, followed by additional 25 basis point cuts at the remaining two meetings this year, before transitioning to a quarterly pace of cuts in 2025, eventually reaching a terminal rate of 3.75-4.00%. Put differently, economists think that Powell “is unlikely to signal 50bp increments, which is also broadly in line with what Fed fund futures are pricing in,” strategists continued.
Furthermore, the Fed is scheduled to release the minutes of the July FOMC meeting next week.
Should the central bank signal that the current policy is too restrictive, it would be perceived as dovish, indicating that the Fed might be open to faster rate cuts. In contrast, if the Fed’s message only slightly deviates from the July meeting, it could be viewed as hawkish compared to current expectations, according to Barclays.
