On Thursday, the biggest event of the week will be fed Chairman Colin Powell’s speech at the Annual Jackson Hole conference, the latest in a series of record highs for US stocks, the $93 mark and the acceleration of gold’s rise through 1950, which could shake global markets and trigger wild swings. Meanwhile, the market was also wary of the situation between China and the US. China accused the US military spy plane of intruding into the no-fly zone of the People’s Liberation Army’s Northern War zone for live-fire exercises, and China responded with a missile test on June 26, the same day the US announced sanctions against 24 Chinese companies involved in building islands in the South China Sea.
The big Day that shook global markets: Is Powell really pigeon?
On Thursday, the markets are bracing for a big event: Fed Chairman Colin Powell’s speech at a virtual Jackson Hole annual conference is expected to provide more clues about the Fed’s inflation and monetary policy strategy.
The Jackson Hole annual meeting of central Banks is often called a “barometer” of turning points in policy. Powell will deliver a speech on the theme of “Monetary Policy Framework Review” at 21:10 P.M. Beijing time on Thursday. It was Mr Powell’s first public appearance since the Fed’s policy meeting in late July, and the market was focused on whether he would mention the revision of inflation expectations to pave the way for looser monetary policy.
The Fed has been reviewing its policy framework, and inflation is part of that. Investors are watching to see if he signals he will move the inflation target to an average level.
The Fed has always had a 2 per cent inflation target, but inflation has been below it for the decade since the financial crisis. Fed watchers said officials were likely to offer a range for tolerable inflation above and below the current 2 per cent target. The Fed is expected to announce this at its September meeting, and Mr Powell’s comments at the annual Jackson Hole symposium could be a preview and provide some clues. Of course, Powell could signal that the committee has yet to make a decision, which Morgan Stanley analyst Michael Kushma said would be the worst case scenario.
‘Expectations for meaningful clues from Powell’s speech are pretty high,’ said Tom Graff, head of fixed income at Brown Advisory. ‘It could well be a historic speech.’
“Mr. Powell will likely provide an outline of the considerations and reasons behind the committee’s review process,” says Roberto Perli, a former Fed economist and partner at Cornerstone Macro in Washington. Then he might conclude by referring to the committee’s consensus that inflation should be allowed to exceed the limit a little, which is the concept of average inflation.”
CNBC commentator Jeff Cox said Powell will give a far-reaching speech on how the Fed will change its stance on inflation.
Tom Graff, head of Brown Advisory fixed income, said it was time for the Fed to change its approach to monetary policy, arguing that the Fed should be doing more than it says and that any boost to financial markets would probably not actually stimulate the economy and pose systemic stability risks.
However, bank of America believes that this policy will lead to a low interest rate policy by the Federal Reserve for the next 42 years, so it is unlikely to happen.
In a recent bank of America report, analysts did not expect Mr Powell to formally adopt an “average inflation target policy”, instead acknowledging that it would take a period of inflation overshoot to produce an average inflation rate of 2 per cent over a cycle.
As to why the federal reserve will not perform a clear “average inflation target”, bank of America thinks that the policy need to make sure that PCE inflation averaged 2% during a specific period, and according to the bank interest rate simulation team, to achieve this goal will require in 42 years the federal reserve left interest rates unchanged, and this will greatly weakens the fed’s policy space to respond to future economic change.
On the eve of Powell’s speech, the dollar was deep in a range and now trades just below the 93 mark.
Network brokerage XM’s senior investment analyst Raffi Boyadjian said, in a period of time average inflation as the goal, rather than 2% of the fixed set goals is likely to mean that inflation will remain in the low post, in the longer time if the fed has confirmed the move, the dollar in the short term the possibility of a substantial rebound will be minimal.
Investors would have been disappointed if Mr. Powell hadn’t hinted Thursday that a correction might be on the way. Bipan Rai, head of north American currency strategy at IBC Capital Markets in Toronto, said the risk is that the market will be disappointed by Powell’s speech, and if so, you could see short dollar positions being liquidated.
Lee Hardman, currency analyst at Bank of Mitsubishi UFJ in Tokyo, said the Fed’s more dovish tone this week had been widely priced into the market, so dollar weakness would be limited. “With the Release of the Fed’s July minutes, there is some risk to the dollar’s upside if Powell disappoints dovish markets this week.”
Spot gold continued to rebound above $20 to break through the 1950 barrier yesterday as the dollar traded in a tight range. It was trading near 1945 after easing slightly from its peak in Asian trading on Thursday.
OANDA analyst Ed Moya believes gold could challenge $2,000 this week if Powell’s comments do not disappoint.
“We expect only a low probability that Fed Chairman Colin Powell’s forthcoming speech at the central bank’s annual meeting will be more dovish than markets expect,” citi analysts said. We think the speech will support the view of a temporary spike in inflation, but headline inflation remains low. Of course, we can’t completely rule out the risk of a very dovish and unexpected situation.”
Citi analysts added: “Our underlying scenario is that the DOLLAR will continue to fall, the euro/dollar will rise, real YIELDS on US treasuries will also fall, and risk assets and precious metals prices will move higher. Also of interest will be what other Fed officials say later, particularly what Vice Chairman Clarida will say on August 31.”
China launches missile in response to US military! Be alert to escalation of the situation in the South China Sea
In addition to focusing on Mr Powell’s remarks, markets remain wary of any further escalation in the US and China.
According to the South China Morning Post, China’s People’s Liberation Army fired two missiles into the South China Sea on Wednesday morning, including a DF-26B missile from Qinghai province and a DF-21D missile from Zhejiang Province.
The DF-26, a nuclear-armed missile with a range of 3,000km to 4,000km, is China’s first conventional ballistic missile capable of reaching Guam and the US military base there. The DF-21 is China’s fully developed missile model, and its anti-ship version, the DF-21D anti-ship ballistic missile (DF-21D), is known as an “aircraft carrier killer” and has been accused of targeting U.S. aircraft carriers.
Both missiles were fired toward the sea between Hainan province and the Paracel islands, sources said.
The hainan maritime safety administration announced Monday that two missiles fell into the no-sail zone during a military training exercise in the southeastern waters of hainan island on Saturday.
“Us military aircraft and warships are increasingly entering the South China Sea, and China is responding to the potential risks posed by US actions,” the source said. China does not want its neighbours to misunderstand Beijing’s aims.
On the evening of April 25, the Chinese Ministry of National Defense issued a message saying that the US U-2 high-altitude reconnaissance aircraft had intruded into the no-fly zone of the PLA Northern Theater Command for live-fire exercises without authorization, which seriously interfered with the normal PLA military exercises and seriously violated the China-us code of conduct for maritime and air security and international practices. The Ministry of National Defense has lodged solemn representations with the US.
On August 26, the United States added 24 Chinese companies and a number of Chinese citizens to its sanctions list for their involvement in continuing construction and military activities in the South China Sea.
In a statement, the Commerce Department said the companies played a “role in assisting the Chinese military” in the construction projects.
In a separate announcement, SECRETARY of State Mike Pompeo said the State Department is imposing visa restrictions on individuals who are “responsible” or “complicit” in the program. The State Department did not release the names of the sanctioned individuals.
“The United States supports a free and open South China Sea,” Pompeo said in a statement. We respect the sovereign rights of all nations, big or small, and we are committed to safeguarding peace and freedom at sea in a manner consistent with international law.”
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