#Bond Report: Treasury yields are mixed as investors recalibrate expectations for Powell’s Jackson Hole speech

What’s driving the market?

Investors are readjusting their expectations for Federal Reserve Chairman Jerome Powell’s speech, set for Friday at 10 a.m. Eastern Time, during the annual Jackson Hole symposium. U.S. stock benchmarks,
SPX,
+1.01%
and
COMP,
+1.59%,
traded in record territory Monday as many wagered that Powell will adopt a more dovish posture than previously anticipated.

Analysts had been bracing for an announcement on the tapering of the Fed’s $120 billion in monthly purchases of Treasurys and mortgage-backed securities before the end of the year. But given the risks to the economy from the continuing pandemic, analysts now say Powell may remain vague around the timing of any tapering process.

Read: Here’s what analysts now expect Fed’s Powell to say about tapering at Jackson Hole event

Monetary policy makers from around the world are set for the Aug. 26 kickoff of the Fed’s symposium, hosted by the Federal Reserve Bank of Kansas City. The symposium is being held entirely virtual.

COVID cases, driven by the spread of the delta variant, have been on the rise since early July alongside a global increase in infections, and market participants around the world have taken notice, as has the Fed.

The prospects of a sluggish recovery from the pandemic is one reason why yields, which move opposite to Treasury prices, have been relatively subdued despite growing evidence of percolating inflation and signs that the Fed wants to end easy-money policies.

Dallas Fed President Robert Kaplan, one of the most vocal proponents for beginning and finishing the tapering process early, said on Friday that he would be open to changing his thinking if evidence emerges that the spread of the delta variant is slowing the economy.

Meanwhile, Monday’s economic data releases were mixed. The Chicago Fed National Activity Index rose to +0.53 in July from -0.01 in June, pointing to a pickup in economic growth last month. Flash readings of services and manufacturing activity from IHS Markit both fell in August, showing businesses suffered some erosion in growth. Existing-home sales edged higher in July, as the inventory of homes for sale grew.

Separately, U.S. Treasury Secretary Janet Yellen told senior White House advisers she backs reappointing Powell, whose term expires in February, as Fed chairman, according to Bloomberg News. Yellen preceded Powell as Fed chief.

What analysts are saying

• “We think Fed Chair Powell will likely use his Jackson Hole speech to build the case that the Fed is getting ever closer to meeting the ‘substantial further progress’ test for tapering QE but will not set out a taper plan or tee up a taper decision at the next FOMC meeting in September — consistent with our call that the decision will likely come in November,” wrote Evercore ISI strategists Krishna Guha and Peter Williams. “Separately we interpret media reports over the weekend as signaling that Powell is increasingly likely to be reappointed Fed chair, and that an announcement could come sooner than is widely expected. Obama chose to renominate Bernanke for a second term around Jackson Hole, and it is not impossible Biden could do the same thing,” the strategists wrote.

• “There is a great deal of emphasis on Jackson Hole; so much so that we worry it’s unwarranted – at least insofar as investors are anticipating any grand policy revelations,” BMO Capital Markets strategist Ian Lyngen wrote in a note. “The KC Fed’s symposium isn’t a policy meeting and while historically it has provided a forum for the Chair to establish the groundwork for a policy transition, it’s unclear how much greater clarity on the precise timing and speed of tapering Powell is willing to provide at this juncture. Had the delta variant not dimmed the global macro outlook as it has, there would be a much better argument to be made that the Chair would offer market-moving tapering details. As it currently stands, the Fed doesn’t have a strong incentive to effectively pre-commit to any course of policy action – at least not more so than has already been accomplished.”

• “Tapering speculation may cause intermittent spikes in bond yields, but we remain opportunistic because this era of low yields is likely to persist,” Scott Ruesterholz, a portfolio manager at Insight Investment, wrote in note. “The Fed has pumped more liquidity into the system than can be deployed and money funds have responded by lodging $1 trillion in cash through the overnight reverse repo system. This extreme liquidity will buffer the initial impacts of tapering.”