"Real rates" are 3X higher than at 2023 Jackson Hole, 1 of 3 reasons we expect markets to ultimately view Fed Chair Powell's comments dovishly = risk-on post-speech.

VIDEO: We expect Fed Chair Powell’s comments at Jackson Hole to be dovish and for markets to interpret these dovishly. This is supportive of stocks near term

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Equity markets are showing jitters ahead of Fed Chair Powell’s speech at Jackson Hole Friday (8/23) at 10am ET. The apprehension is understandable given the strong rally since the August 5th lows (Tokyo Black Monday). And understandable given so many FOMC members continue to speak about needing to be “convinced” that inflation is improving, a constraint of being “data dependent.”

• That said, we see 3 reasons equity investors will ultimately interpret Fed Chair Powell comments dovishly. That is, the Fed Chair could even speak hawkishly, but in the aftermath, we believe investors will take heart and this will be supportive of stocks gaining into Labor Day.
• First, “real” interest rates are just way too tight. This is measured by taking Fed Funds and subtracting Core PCE YoY. Consider where “real” rates stand in 2024 vs 2022 and 2023:
  – 2022: -2.46% <– too loose, hence, Powell “pain ahead”
  – 2023: +1.22% <– too tight, hence, “goldilocks”
  – 2024: +2.87% <– 3X tighter than 2023, hence, dovish
• We do not know what Fed Chair Powell will say, but the context is entirely different compared to recent years. Real rates have never been this restrictive at a time when inflationary pressures are ebbing and when labor markets are softening.
• The next FOMC meeting is not until September, so this Jackson Hole speech serves as a key communication tool until September. And given the softening of inflation and visible weakening of labor, it would seem intuitive for the Fed to want financial conditions to be easing.
• Of the last 5 years, 2019, 2020 and 2023 had relatively restrictive “real rates” on the eve of Jackson Hole. This is akin to yesterday. Here are:
  – 3M, 6M and 12M return of S&P 500 SPY 1.08%
  – 2019: +6%, +15%, +16%
  – 2020: +5%, +11%, +28%
  – 2023: +4%, +14%, +28%
• You get the picture? The fact that real rates are restrictive gives a different context to Jackson Hole, in our view.
• By the way, this is consistent with the technical view by Mark Newton, Head of Technical Strategy at Fundstrat. In yesterday’s commentary:
  – “it looks right to stay bullish past Labor Day and expect any weakness into the Jackson Hole meeting likely proves short-lived“
• In other words, he is buying the dips, if there is one. Hopefully, markets do not dip on Friday though.
• Lastly, we highlight that OIS inflation forward 1Y-1Y (market-based inflation expectations 1-yr from now for 12M forward) stand at the lowest in 4 years at 3.2%. There were 3 prior nadirs in this OIS forward (see below):
  – 3 of 3 times, we see equities rally strongly after the nadir
  – July 2022
  – May 2023
  – Jan 2024
• Why? We think this marks the point when inflation fears ebb. Thus, investors can go “risk on.” In any case, this lines up with the positive technical view and the expectations for markets to see Powell’s comments dovishly.
• Adding to this, we noted earlier this week, we ultimately see multiple reasons equities are positive risk/reward over the next 10 trading days:
  – 8/23: Powell likely to be dovish at Jackson Hole
  – 8/28: NVDA earnings reinforce AI thesis
  – 9/3: Given rebound rally, investors unlikely to want to be “de-risked” into Labor Day
  – ICI Money Market data shows institutions and retail raised $97 billion in past 2-3 weeks, as many de-risked due to Tokyo Monday and “Sahm-rule” recession fears
  – Many investors sidelined due to Iran-Israel war concerns

BOTTOM LINE: Evidence growing that equities made their summer lows on 8/5.

Generally, August to October is a tough period for markets. One important client, ES of NY, has repeatedly mentioned to me “I never make money in August.” And that is consistent with the view of Mark Newton, Head of Technical Strategy, that Aug to Oct is window where stocks’ risk/reward is less attractive than the period post-election.

• Since 1928, however, of that period between August to October, the S&P 500 has bottomed most commonly during August.
  – August, Sept and Oct low %: 44%, 17%, 40%
  – meaning, markets most likely bottom in August (for that period)
• Guess what is the most common week for the bottom?
  – the first week of August
  – 15 of the 96 years
• Lastly, we need to be mindful that Iran could launch an attack this week, in response to several high profile assassinations. The Olympics ended August 11. So, markets are naturally wary of the headline risk from this. But we know the adage:
  – “sell the build-up, buy the invasion”
• The only thing is that at the start of the Russia-Ukraine war, markets had a short relief rally. But that war has since become a larger and most costly conflict. So, problems percolating in the Middle East are not to be taken lightly.

• But just because markets might have some headwinds near term does not change the probabilities of a strong second half. As we noted previously:
  – Since 1950, when S&P 500 is up >10% in the first half
  – 23 instances
  – 2H (second half) gains +9.8%, 83% win-ratio
  – the 4 negative 2H instances were 1975, 1983, 1986, 1987
  – essentially, all the negative 2H were during Volcker era

Bottom line, markets are certainly showing strong signs of gaining their footing. And we also view this panic as ultimately being a growth scare (coupled with a carry trade unwind).

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Key incoming data August 2024:

• 8/1 8:30 AM ET: 2Q P Nonfarm Productivity Tame
• 8/1 8:30 AM ET: 2Q P Unit Labor Costs Tame
• 8/1 9:45 AM ET: Jul F S&P Global Manufacturing PMI Tame
• 8/1 10:00 AM ET: Jul ISM Manufacturing PMI Tame
• 8/2 8:30 AM ET: Jul Jobs Report Tame
• 8/2 10:00 AM ET: Jun F Durable Goods Orders Tame
• 8/5 9:45 AM ET: Jul F S&P Global Services PMI Tame
• 8/5 10:00 AM ET: Jul ISM Services PMI Tame
• 8/6 8:30 AM ET: Jun Trade Balance Tame
• 8/7 9:00 AM ET: Jul F Manheim Used vehicle Index Mixed
• 8/12 11:00 AM ET: Jul NY Fed 1yr Inf Exp Tame
• 8/13 6:00 AM ET: Jul Small Business Optimism Survey Tame
• 8/13 8:30 AM ET: Jul PPI Tame
• 8/14 8:30 AM ET: Jul CPI Tame
• 8/15 8:30 AM ET: Jul Retail Sales Data Tame
• 8/15 8:30 AM ET: Aug Empire Manufacturing Survey Tame
• 8/15 8:30 AM ET: Aug Philly Fed Business Outlook Tame
• 8/15 10:00 AM ET: Aug NAHB Housing Market Index Tame
• 8/15 4:00 PM ET: Jun Net TIC Flows Tame
• 8/16 10:00 AM ET: Aug P U. Mich. Sentiment and Inflation Expectation Tame
• 8/19 9:00 AM ET: Aug M Manheim Used vehicle index Tame
• 8/21 2:00 PM ET: Jul FOMC Meeting Minutes Dovish
• 8/22 8:30 AM ET: Jul Chicago Fed Nat Activity Index Tame
• 8/22 9:45 AM ET: Aug P S&P Global Manufacturing PMI Tame
• 8/22 9:45 AM ET: Aug P S&P Global Services PMI Tame
• 8/22 10:00 AM ET: Jul Existing Home Sales Tame
• 8/23 10:00 AM ET: Jul New Home Sales
• 8/26 10:00 AM ET: Jul P Durable Goods Orders
• 8/26 10:30 AM ET: Aug Dallas Fed Manuf. Activity Survey
• 8/27 9:00 AM ET: Jun S&P CoreLogic CS home price
• 8/27 10:00 AM ET: Aug Conference Board Consumer Confidence
• 8/29 8:30 AM ET: 2Q S 2024 GDP
• 8/30 8:30 AM ET: Jul PCE Deflator
• 8/30 10:00 AM ET: Aug F U. Mich. Sentiment and Inflation Expectation

Economic Data Performance Tracker 2024:

Economic Data Performance Tracker 2023: