GM. This is Milk Road Macro, the newsletter that spots a dovish pivot faster than the market can say “September cut incoming”.
Here’s what we got for you today:
- ✍️ Deciphering Powell at Jackson Hole
- 🎙️ The Milk Road Macro Show: Why Wall Street is About to Rush Into Crypto w/ Christopher Kuiper
- 🍪 Nvidia will report its earnings on Wednesday
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DECIPHERING POWELL AT JACKSON HOLE (P1)
Asset markets surged on Friday, with stocks and crypto up big.
This was because Fed Chair Jerome Powell delivered a highly-anticipated speech at Jackson Hole.
And he all but confirmed a rate cut in September.
The cutting cycle is still very much alive.
So what happened at Jackson Hole (in simple terms)?
How did asset markets respond?
And what’s next?
Let’s take a look…
So what happened at Jackson Hole (in simple terms)?
Just to recap, the Fed is currently grappling with:
- Inflation that’s still well above its 2% target - and rising
- A labor market that’s showing some potential signs of weakness
So Jackson Hole was set to give us some big clues as to the Fed’s current thinking.
As I mentioned last week, the Jackson Hole speech was all about how Powell is weighing the risks associated with a perceived weakening labor market (warranting cuts) and rising inflation (warranting no cuts).
And in the end, we learned quite a lot.
Here are the key lines from Powell:
“The stability of the unemployment rate and other labor market measures allows us to proceed carefully as we consider changes to our policy stance. With policy in restrictive territory, the baseline outlook and the shifting balance of risks may warrant adjusting our policy stance.”
This is “central banker speak” for: we are very likely to cut rates in September.
Powell basically confirmed that the Fed is currently more worried about the labor market than rising inflation.
He said the labor market “faces increasing downside risks”.
And he said that the effects of tariffs on consumer prices are “now clearly visible”, but added that the base case is “the effects will be short-lived” and that “longer-term inflation expectations remain well-anchored”.
A JP Morgan note to clients states:
"We remain tactically bullish...Powell’s speech at Jackson Hole confirms a Sept Fed cut, which ignited the rally which also broadened...at this stage, even a hotter CPI print on Sep 11 seems unlikely to derail optimism surrounding accommodative monetary policy.”
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DECIPHERING POWELL AT JACKSON HOLE (P2)
How did markets respond?
Expected rate cuts can be either bullish or bearish for risk assets - it depends on the underlying market regime.
While there is some potential weakness in the labor market, recession risk currently still remains relatively low, so rate cuts are still generally “good news” for risk assets.
During the Powell speech, the S&P 500 moved higher.
The Russell 2000 (including smaller and more interest rate sensitive companies) ripped even higher.
Bitcoin and Ethereum also moved strongly higher (although both have since largely given up the Jackson Hole gains).
Gold moved higher.
The dollar, as measured by the Dollar Index (DXY), weakened significantly.
Last week, I outlined how it’s important to watch longer-term Treasury yields as we move closer to Fed rate cuts.
There’s no sign (yet) of the “Bond Vigilantes”, as 10-year yields dropped on Friday (although they’ve been creeping back up since).
What’s next?
Powell gave a pretty clear indication that the Fed is likely to cut rates at the next FOMC meeting in September.
So, what’s next?
The market is currently pricing roughly two rate cuts in total for 2025 - so likely one in September and then another one in either October or December (the two remaining Fed meetings).
However, arguably the most important thing is that the Fed is still firmly in a cutting cycle - and the chance of a rate hike is almost zero currently.
The exact timing of cuts is not as important.
Cuts can be priced in, markets can look forward to future easing, and as long as the risk of recession remains low, this is generally a bullish environment for risk assets.
We’re still in a world of slow and methodical “maintenance cuts” - not “panic cuts”.
The market-implied terminal rate (where the market expects the Federal Funds Rate will be when the cutting cycle ends) is currently around 3% (five cuts expected in total).
This has fluctuated between roughly 3% and 3.4% for a few months now.
So, in other words, it’s been fairly stable.
It’s only when the market fears a recession that the floor begins to rapidly fall, with new cuts priced in as the market expects panic at the Fed.
Wrapping up
We saw a dovish Powell at Jackson Hole - and a rate cut in September is now very likely.
But it’s still worth monitoring data as it comes in.
We have one inflation print and one jobs data print before the September rate decision.
The initial risk asset reaction to Jackson Hole was positive.
But one thing to bear in mind: September is typically a weaker month from a seasonality perspective for risk assets, and if we look at the last four Jackson Hole conferences, major US equity indices dipped in the aftermath.
History might suggest we could see a “cooling off period” after the Jackson Hole excitement.
That’s it for this edition - catch you in the next one.
MACRO PRO IS HERE🥛
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BITE-SIZED COOKIES FOR THE ROAD 🍪
President Trump said he has removed Fed Governor Lisa Cook from her post after accusing her of alleged mortgage fraud. The move marks an unprecedented action, thrusting the Fed into uncharted territory and likely setting up a legal battle that could reach the Supreme Court.
New home sales in the US were expected to rise (+0.6% MoM) last month but instead they dropped 0.6% MoM. New home sales remain down over 8% YoY and prices have fallen on an annual basis every month this year except one.
Nvidia, the largest publicly traded company in the world, will report its earnings on Wednesday. Nvidia’s earnings have become an important event for the US stock market, due to the firm’s large weighting in indexes and its integral role within the AI ecosystem.
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