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Friday is here, which means the time is nigh to hear from Fed Chair Powell. His speech on the Economic Outlook, which has been talked about all week, will be given at 10:00 a.m. ET at the Jackson Hole Economic Symposium.
The speech itself should be informative, but will it be telling? That is the question the market has waited patiently to have answered.
Will Fed Chair Powell implicitly endorse a rate cut in September? Will he leave the door open for a 50-basis points rate cut?
No one expects an explicit endorsement from the Fed Chair. That isn't his style, so the language he uses in his speech, and the tone he adopts in giving the speech, will go a long way toward providing the answers the market has been seeking and presumptively pricing into stock, bond, and currency prices.
There is no question that the market expects a 25-basis points rate cut at the September FOMC meeting. According to the CME FedWatch Tool, there is a 100% probability of at least a 25-basis points rate cut. In turn, there is a 26.5% probability of a 50-basis points rate cut.
The equity futures market, also bolstered by some early strength in the mega-cap stocks, is looking hopeful that it won't be disappointed by Fed Chair Powell. Currently, the S&P 500 futures are up 35 points and are trading 0.6% above fair value, the Nasdaq 100 futures are up 175 points and are trading 0.9% above fair value, and the Dow Jones Industrial Average futures are up 188 points and are trading 0.5% above fair value.
That positioning has the major indices on track for a higher open. What happens after Fed Chair Powell speaks will be the real focal point.
Traders undoubtedly appreciate the possibility that there could be a "sell the news" reaction, primarily because the market has been rallying the past few weeks in part on the belief that the Fed will cut rates in September and again in November and December.
In the unlikely event Fed Chair Powell puts a lid on the September rate cut idea, one can assume that there will be some decent fallout in the stock and bond markets. Again, though, with the positive move made by stocks and bonds in recent weeks, and the positioning of the equity futures market this morning, plenty of participants expect the Fed Chair to fall in-line with consensus views and not disappoint with his words or his tone.
The 2-yr note yield, which is sensitive to changes in the fed funds rate, is unchanged this morning at 3.99%, but it is down 27 basis points for the month. That's the behavior of a market expecting monetary policy to be less restrictive in coming months.
All that is left to see and hear now is if Fed Chair Powell's speech behavior validates that view.
