Yellen disappointed the markets at Jackson Hole – Rabobank

In view of analysts at Rabobank, Fed Chair Yellen’s speech at Jackson Hole came out disappointed if they were hoping for further clues about monetary policy.

Key Quotes

“The lack of signals about the timing of the announcement of Fed balance sheet normalisation and the next rate hike was interpreted as ‘dovish’ by the markets and led to a jump in EUR/USD and a decline in the 10y US treasury yield. Our take is that the FOMC is still aiming for a September announcement on balance sheet normalisation and a December rate hike. However, we think that the latter will not materialise as inflation remains weak. Yellen’s speech was completely devoted to financial regulatory reforms. Her defence of post-crisis regulation may reduce her chances of another term; although they were low to begin with. While President Trump has become more positive of her monetary policy, he may not see her as the ideal candidate to reduce regulation. Note that her term ends in February 2018. At present, President Trump’s economic policy director Gary Cohn appears to be the leading candidate to replace Janet Yellen.”

“The jump in EUR/USD after Yellen’s speech was only a first jab at the exchange rate, as some market participants played it more defensively and tested the waters for a few rounds before they really struck back. When Draghi’s speech also did not touch on the ECB’s plans for the near-future (even though he wasn’t really expected to touch upon the topic), this punched EUR/USD to a new recent high.”

“Out of all major speakers on the slate, the Governor of the Bank of Japan was probably the most outspoken, saying that the US economy is in a much better place than Japan is currently. Kuroda stated that current Japanese growth at 4% “cannot be sustained”, suggesting that 2% is a much more likely rate of growth. Kuroda concluded that the BoJ will therefore “for some time have to continue this extremely accommodative policy”.”

“The stronger euro is an unfortunate development especially for the ECB’s Governing Council, as it further reduces the already meagre inflationary pressures in the currency block. This makes a (forced) decision to exit QE an even harder one to make, or justify. As we’ve long argued, that decision will not be based on a technical KO –with QE definitively beating deflation and ‘lowflation’– but rather a victory for (low) inflation, winning on points (or lack thereof on the inflation scoreboard) – with QE not having enough stamina to keep throwing punches at its opponent.”