Powell will be more hawkish than markets are anticipating, and that that’s not good news for gold bulls. Here’s why…
The 2019 Economic Symposium in Jackson Hole has begun!
Today, we’ll hear Jerome Powell discuss the latest monetary policy shifts. How will it affect the gold market?
Jackson Hole 2019 Has Begun
This week is rather light in terms of incoming economic data, with the minutes from the last FOMC meeting being the only exception. Now, investors await the annual Jackson Hole Economic Policy Symposium scheduled August 22-24 in Wyoming. The conference is one of the most famous and important gatherings of central bankers, policy experts, academics, and leading financial market players, and it is closely followed by investors. It is very often a major market-moving event, as central banks hint at new policy moves. The best example may be the 2010 symposium when Ben Bernanke announced the second round of quantitative easing, which supported the gold prices. On the contrary, in 2016, Janet Yellen delivered a hawkish speech which pushed the yellow metal downward.
But what should we expect this time? The topic of this year’s conference is “Challenges for Monetary Policy“, so the participants would discuss the implications of divergence in interest rates, QE’s impact on capital markets, the path to normalization, the decline in the natural interest rate, the impact of trade wars and fiscal policy on the central banking, etc.
Draghi and Powell: The Last Meeting in Wyoming
However, investors will be watching specifically for remarks from Mario Draghi and Jerome Powell. The former, who will serve as the ECB President only till the end of October, could hint at new simulative measures that the ECB could announce in September. In particular, we could hear how low can policy rates go. The recent discussion paper by the Bank of Japan concludes the “reversal rate”, at which further declines become contractionary, at minus 1 percent for the Eurozone. We bet that Draghi has already read this paper…
Powell is expected to deliver his speech on Friday. Many investors hope that the Fed Chair signal further interest rate cut. According to the CME, the markets expect two 25 basis point cuts by October and perhaps one more in December. Some people even dream about 50 basis point in September, or even larger stimulus. For example, President Trump tweeted on Monday:
Our Economy is very strong, despite the horrendous lack of vision by Jay Powell and the Fed, but the Democrats are trying to “will” the Economy to be bad for purposes of the 2020 Election. Very Selfish! Our dollar is so strong that it is sadly hurting other parts of the world… The Fed Rate, over a fairly short period of time, should be reduced by at least 100 basis points, with perhaps some quantitative easing as well. If that happened, our Economy would be even better, and the World Economy would be greatly and quickly enhanced-good for everyone!
So yes, Powell is under pressure. However, we believe that he will downplay the potential of a 50 basis point cut in September or of three more interest rate cuts this year. Instead, he may open the door to another 25-basis-point cut but avoid promising anything more. Powell will try to not paint himself into a corner again, especially that the domestic data does not justify more accommodation. Actually, as we reported on Tuesday, the inflation edged up while retail sales surged since the last FOMC meeting.
Implications for Gold
What should the conference in Jackson Hole bring for the gold market? We expect that Powell will be more hawkish than markets are anticipating. If true, we could see disappointment among the equity investors and some downside price action in the gold market. However, the overall tone of the conference could be dovish, as the participants would probably confirm the unfolding global monetary policy reversal. After all, several central banks have decided to cut rates in the past week, while a few major economies are on the verge of or already in a recession. So if Powell expresses responsibility for the global economy or just gives in to pressure, he will deliver what the markets and the President want. Gold would continue to be well-bid, then. But, given the recent good economic data (putting aside the contraction in the industrial sector), we bet that Powell will insist – remember that two members of the FOMC dissented in July – that the July cut was a “mid-course correction”, not the beginning for a new easing cycle. At least for a while longer.
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Disclaimer: Please note that the aim of the above analysis is to discuss the likely long-term impact of the featured phenomenon on the price of gold and this analysis does not indicate (nor does it aim to do so) whether gold is likely to move higher or lower in the short- or medium term. In order to determine the latter, many additional factors need to be considered (i.e. sentiment, chart patterns, cycles, indicators, ratios, self-similar patterns and more) and we are taking them into account (and discussing the short- and medium-term outlook) in our trading alerts.