Try to avoid a tantrum in the middle of taper talk

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Esther George, John Williams and Jerome Powell, in Jackson Hole, Wyoming August 24, 2018.

David A. Grogan | CNBC

The Federal Reserve’s efforts to reverse its loose policies will be a dominant theme for markets in the coming week as central bankers meet virtually for a major annual summit.

Instead of meeting in the open air at the end of August against the backdrop of the Grand Tetons, central bankers will host their annual Jackson Hole Economic Policy Symposium online because of the Covid risks. Fed officials will be under pressure to move gently towards less political support without causing a market tantrum.

Federal Reserve officials, in numerous recent speeches and interviews, have already managed to raise expectations as to when they could begin slowly reducing their monthly $ 120 billion in bond purchases. More of this talk is expected at their annual symposium starting Thursday.

The Fed chairman’s speech is usually the highlight of the annual event, and various Fed chairs took advantage of the Jackson Hole, Wyoming meeting to deliver important messages. The question is whether Jerome Powell will be channeling his Friday morning speech to provide more details on how the Fed could begin unwinding its bond purchases, and whether he is even personally ready to accept it.

“We don’t expect a major policy reveal at this meeting,” said Mark Cabana, head of US short strategy at Bank of America. “I don’t think Powell wants to do the front [September] Meeting in the face of the myriad of voices that are out there. I don’t think Powell really wants to cause a stir now. “

In addition to the Fed, there are several economic reports during the week. Existing home sales will be published on Monday; New home sales Tuesday and durable goods Wednesday. Friday has data on consumer spending and the inflation index, which the Fed is closely monitoring.

Revenue is also expected from companies like Best Buy and Nordstrom on Tuesday, Salesforce.com on Wednesday, and HP and Dell Technologies on Thursday.

Fed and Markets

Most important, however, will be the Fed as investors will also keep an eye on how the economy is reacting to the spread of the Covid Delta variant. Stocks were lower for the past week, with the S&P 500 down 0.6%.

There could be some volatility around the Fed symposium after the minutes of the last official meeting were released last Tuesday, which shook investors. The minutes stated that most members of the Federal Reserve’s Open Market Committee are ready to rejuvenate this year if the economy is strong enough. Cabana said he changed his mind following the release and now expects the Fed to begin reducing purchases in November rather than January.

“We just think that this signal is pretty clear in communication,” he said. “Right now, it’s safe to say that they will want to start later this year and we believe the dates will allow them to do so.”

As for Powell, “he will not announce a reduction. What we expect is that he will give a live speech that will talk about a lot of the progress that has been made since Covid began, and there is a lot of that, ”Cabana said. He said Powell could reiterate that the Fed will be data dependent in its decision to reduce, and that many Fed officials believe they could make sufficient progress towards that goal later this year.

The protocol caused hiccups in markets as investors reacted to the idea that the Fed will take its first steps to end the extraordinary measures taken to combat the effects of the pandemic. The bond program could take months to expire, but once it ends it could herald the start of rate hikes.

Diane Swonk, chief economist at Grant Thornton, said Powell should come up with a roadmap for rejuvenating the Fed, but with the caveat that he would be able to step down if Covid becomes more severe than expected.

“The asset purchases should first stabilize the financial situation. … There is clearly more consensus building than at the last meeting in July, given how [Fed officials] have been speaking since then, “said Swonk.” They want to handle the asset purchases. If you pull them down, don’t apply the brakes. You just take your foot off the accelerator. The difference is important to [Powell] to be laid out in Jackson Hole. “

Swonk said the Fed needs to provide a roadmap for tapering, but also with off-ramps in case Covid is worse than expected.

“To avoid this turning into a tantrum and the financial markets from collapsing again, he wants to get the message and context out as far as possible,” said Swonk. “If that becomes a disorderly reaction and things melt together, they would have to turn around. Where we are, these types of purchases are no longer warranted and can have a detrimental effect on the liquidity they put into financial markets “when it is no longer needed.”

Calendar the week ahead (times in ET)

Monday

Merits: JD.com, Palo Alto Networks, Madison Square Garden

10.00 am Sale of existing homes

Tuesday

Merits: Best Buy, Bank of Montreal, Nordstrom, Intuit, Urban Outfitters, Toll Brothers, Advanced Auto Parts, Medtronic

10 a.m. Sale of new homes

Wednesday

Merits: Salesforce.com, Royal Bank of Canada, Snowflake, Box, Autodesk, Express, Dick’s Sporting Goods, Shoe Carnival, NetApp, Splunk, Pure Storage

8:30 a.m. Durable goods

Thursday

Merits: HP, Dell, Gap, Abercrombie and Fitch, Dollar General, Dollar Tree, Hains Celestial, Ulta Beauty, Peloton, Workday, VMWare, Ollies Bargain, Marvell, Toronto-Dominion, Sanderson Farms

8:30 a.m. unemployment claims

8:30 a.m. GDP in the 2nd quarter

Friday

Merits: Big lots

8:30 am Personal Income and Expenses

8:30 am Advanced trading

10 a.m. consumer spending (end of August)