I was away much of last week, traveling with my son and getting him moved in for his first year of college. He's all set!
Along the way we were able to catch a game at the annual Little League World Series in Williamsport, Pennsylvania. If you're a baseball fan, I would highly recommend it. It's a great event!
As for markets, in my last note we talked about the crisis-like shock that took place to start the month.
It was driven by the outlook on central bank policies in Japan and the U.S. — mostly, the prospect of Japan's exit from emergency level policies which would reduce global liquidity and financial stability (which includes the reduced appeal of the yen carry trade).
In response to the market shock, at the depths of the decline the Deputy of the Bank of Japan gave a very direct prepared speech titled Japan's Economy and Monetary Policy. In it, he went to great lengths to communicate to markets that the moves in the Japanese stock market and in the yen were unwelcomed ("unstable" in his words) — and as a result he said the Bank would "maintain monetary easing" for the time being.
So, just days after taking the second step toward exiting emergency level policies, the Bank of Japan was forced to walk it back (verbal intervention, if not actual intervention/asset purchases).
As you can see in the chart below, U.S. stocks have since had a full V-shaped recovery.
Japanese stocks are near a V-shaped recovery …
With the above in mind, let's talk about the big event of this week.
The Kansas City Fed will host its annual economic symposium in Jackson Hole, Wyoming, beginning Thursday and running through Saturday.
This event will be well attended by the world's most powerful central bankers and finance officials. And historically it has served as a platform for central bankers to communicate important signals regarding policy adjustments.
With that, Jerome Powell will deliver a prepared speech at 10am (EST) Friday morning.
Clearly the potential "policy adjustment" here would be the signal to kick off the easing cycle in September.
How can the Fed position it, as to not trigger another purge of the yen carry trade (i.e. selling dollars, buying back yen) – and send markets into a tailspin.
Don't call it an easing cycle.
He can follow the playbook of the European Central Bank and the Bank of Canada, by positioning a rate cut as just "reducing restriction" to maintain the level of restriction as inflation has fallen — not necessarily the beginning of an easing cycle, just reducing restriction.
He laid the groundwork for it in the post-FOMC press conference a few weeks ago, saying "the job is not done on inflation, but nonetheless we can afford to begin to dial back restriction in our policy rate."
That, plus the Bank of Japan's walk back on a tightening path might keep markets in check.
