S&P 500 hit the 4500 mark on Wednesday, and at this speed, we could well see the Credit Suisse’s 5000 target reached before next year. Or not.
The stock market really starts gaining a momentum that worries many people, as the more the equity prices go up, the sharper a downside correction would be.
So, all eyes and ears are now set to the Jackson Hole symposium, where the Federal Reserve (Fed) Chair Jerome Powell will speak about the Fed’s plans about what’s coming next.
To predict how the market could react to Mr. Powell’s speech, we first need to understand what’s priced in and what’s not.
Actual price levels in major US indices include the information that the Fed could start tapering its bond purchases before the end of the year, or at the beginning of the next, based on the fact that the US jobs market is showing an encouraging progress and inflation is relatively high.
But, we also know that the rising Covid cases threatens a healthy recovery in the coming months, and Powell will certainly say that the Fed should monitor the economic data closely to adjust its policy to it.
What’s left to price is, which between the strong jobs/high inflation and the threat of a slowdown in economic recovery would weight more? There are two options: either the Fed is still firmly convinced that the strong progress in jobs figures justify tapering its bond purchases according to the plan, or soft economic data could change the original plan and bring the Fed to delay normalization on the QE front, meanwhile the interest rates will stay near zero levels for at least until 2023.
Speaking of the economic data, the major data on today’s calendar is the US Q2 GDP update, which is expected to print 6.7% growth versus 6.5% released earlier. I believe (hope) that good data should still trigger a positive market reaction and should not demoralize investors even it means a less dovish Fed, but a soft data could be more efficient in boosting the Fed doves, hence the equity bulls at a time the Fed is discussion tapering.
And speaking of the doves, the European Central Bank meeting minutes should show nothing less than a sufficiently dovish policy stance today, as European policy makers recently changed their inflation goal from ‘below but close to 2%’ to 2%, and seem ready to tolerate higher inflation in the short run for the sake of a healthy post-pandemic recovery, especially now that we see the delta worries rising. And that dovishness from the ECB should keep the euro under pressure against the US dollar. We see solid offers into the 1.18 mark, but the euro bears remain timid before Powell’s Jackson Hole speech, in case Powell doesn’t stick to the text and say something surprisingly dovish. Yet the sentiment in EURUSD remains comfortably bearish in the medium run: the Fed tapering is coming sooner rather than later, while the ECB is taking the opposite direction of more support.
When it comes to the Fed, calling off the bond tapering is not the base case scenario. The base case scenario is Jerome Powell sticking to the taper plan, but cautiously.
Hence, Fed sticking to its tapering plan could awaken some bears and trigger a certain profit taking across the major US indices in the coming sessions, but the depression may not last long as the market bears seem hibernating before time this year.
