Jay Powell will make a prepared speech tomorrow at the annual Kansas City Fed global economic symposium.  This event, typically hosted in Jackson Hole (but online this year), has a history of gathering the world's most powerful central bankers.  And there is a history of major policy signalling.  

In 2010, Bernanke telegraphed QE2 in his Jackson Hole Speech.  Two years later, he telegraphed QE3 at the event.  In 2014, Mario Draghi (head of the European Central Bank) telegraphed aggressive action from the ECB to battle deflationary pressures — a bond buying program was formally announced just days later. 

Interestingly, the Kansas City Fed moved the event to Jackson Hole, back in 1982, in effort to convince Paul Volcker to attend – the Fed Chair and a fly fishing enthusiast.  Volcker was, at the time, aggressively battling high inflation with very aggressive interest rate hikes. 

Of course, we enter this Jackson Hole meeting with the most dangerous inflation we've seen since the Volcker era. 

And remember, just last week Powell talked specifically about Volcker in a town hall meeting.  He admiringly called him "the most distinguished public servant, in economies, in [Powell's] lifetime."  And he admires him because of his courage to take on the unpopular, but necessary path of beating what Powell calls The Great Inflation.

Volcker beat double-digit inflation with short-term interest rates that approached 20% — and in doing so, he took the economy into recession.  But he also set the stage for a long and very good period of development for the U.S. economy. 

Now, we already know the Fed has pivoted, over the past month, in acknowledgement of the aggressive inflation already baked into the economy.  On that note, I suspect we'll see Powell, once again, bring up the Volcker era in his prepared speech on Friday.  If he does, the markets may have to recalibrate for a Fed that is beginning to see a higher risk (than previously) that they may have to become inflation fighters in the near future. 

Sticking with the theme we've discussed the past two days, rates continue to rise on optimism about the economic recovery.  And that's being fueled by optimism about the pandemic outlook (with the expectation of widespread global vaccine mandates, following the FDA's approval of Pfizer's vaccine).

So, U.S. 10 year yields are now 10 basis points higher than prior to the FDA announcement on Tuesday.  And as we discussed on Tuesday, we should expect the world to follow the lead of the FDA, with regulator approvals and subsequent widespread vaccine mandates.  With that, yields globally are on the move. 

Today, German yields had the biggest one day move since March.  Italian yields (one of the weak spots in Europe) jumped by nine basis points, the biggest move since late February.  What's in common now, with that late February – early March period?  Congress was about to put a stamp of approval on the $1.9 trillion Biden spending package.  Today, they are about to put a stamp of approval on another $4.5 trillion in government spending.  

In anticipation of the $1.9 trillion, the U.S. ten year yield rose from 1% to 1.75% in forty days, earlier this year.  The difference then:  The Fed was not only concerned about rising rates, there were reports that they might consider taking additional action to force down longer-term market interest rates (through another iteration of "operation twist"). 

This time around, the Fed is actually talking UP rates.  

We talked yesterday about the FDA vaccine approval as another November 9th, 2020-like moment,  where markets interpret it as new hope that the pandemic will end. 

And that — combined with even more extravagant government spending coming down the pike, and a Fed that has prepared markets for an end of emergency policies — is a recipe for the beginning of the end of ultra-low rates.  And it all is reflective of a sustained economic recovery. 

Indeed, rates were on the move today, trading up to 1.30%.  And no surprise, when we look across the stock market, small cap and value stocks have been the outperformers the past two days on this formula of "pandemic escape" and sustained economic recovery. 

After all, coming out of recession, small caps tend to follow the path of interest rates (climbing rates, suggests more optimism about the outlook).  With that, as interest rates (the 10-year yield) rose from as low as 31 basis points, last year, to as high as 1.78% this year, small cap value stocks soared.  Conversely, as you can see in the chart below, as we've seen a decline back to 1.13% on the ten-year over the past few months, small caps have fallen, diverging from the performance of larger cap growth stocks (and the broader market).

Stocks trade to new record highs today.  The dollar is lower.  And commodities are up.

While the Fed has another highly anticipated speech for markets to parse this week, the driver for global markets today (higher) was an FDA approval of the Pfizer vaccine. 

Just as CDC guidelines have become the standard for corporate and government decision-making, under the assumption that any legal judgement will defer to the guidelines of the governmental agency.  This FDA approval will trigger, and very likely set a standard for U.S. mandates – and global mandates will follow the lead of the U.S.

This comes as downward revisions have been coming in for Q3 GDP, in the wake of a resurgence in COVID cases over the past two months, and related softening economic data.  The FDA vaccine approval should reverse that tide, especially combined with the $4.5 trillion of new government spending that the House is "evaluating" this week. 

I'm reminded of the well placed November 9th (2020) announcement from Pfizer, of vaccine efficacy.  It sparked hope of the end of the pandemic, and that came alongside an election that was telegraphing massive fiscal spending. 

From that date, stocks soared, rallying 28%, and at a near perfect 45-degree angle.  Crude oil never looked back, following a similar path to that of stocks (up and to the right on the chart) — from $37 to as high as $77.  And yields never looked back, trading from 0.80% to as high as 1.78%.

This FDA approval could provide a similar catalyst for hope on the pandemic outlook, and for markets. 

Given the recent pull back in crude oil and bond yields, these two markets look like a big bounce is in store, following this FDA catalyst.

Crude oil put in a technical reversal signal today (a bullish outside day)…