The highlight of the week for the USD doesn’t come around until the week is nearly in the books. Janet Yellen’s speech at the Jackson Hole Economic Symposium has the prospect of setting out the path for the USD for the remainder of the year. The speech is widely touted to show a central bank Governor who is still unhappy with the level of job creation in the United States. It will be a communication of occasional brightness and not dazzling light – much like the US economy itself.
How close she will actually get to monetary policy is very much in question. Previous Jackson Hole Symposium speeches have veered between excessively wonky speeches and announcements of further quantitative easing. In all likelihood, given the title of Yellen’s speech – “Re-Evaluating Labor Market Dynamics” – we are more towards the former. Job market dynamics are Yellen’s bread and butter, and with the US dollar and treasuries no longer in any need of opaque verbal intervention she can concentrate on the academic side of things.
We know that the labor market improvement that has seen 6 consecutive months of 200k+ additions to payrolls has continued into Q3. Estimates of weekly jobless claims are now starting to sit below the 300k mark for the first time since the beginning of the Global Financial Crisis and we can start to pencil in a sufficient tightening of slack in the overall labor market in order to expect a forthcoming uplift in wages. Despite this, we would expect that comments around the labor market will focus on what more the Fed can do and has done than chatting about a post-QE landscape.
Tuesday’s CPI release has previously been characterized as “noisy” by the Federal Reserve Chair. While this is not the Fed’s preferred inflation measure – that honour is bestowed on the Personal Consumption Index or PCE next due on August 29th – we will be looking to see what prices are up. Last week’s Producer Price Index announcement showed a slight softening in factory gate inflation and this should CPI remain pinned close to the 2% figure.
A run higher in inflation would be welcomed by the Fed and the markets for different reasons. The Federal Reserve views an inflationary pop higher as a catalyst for more and more people to enter the labor market, bringing both the unemployment rate and the participation rate lower. After all, if goods and services are becoming increasingly more expensive then you are more incentivized to go and earn the cash needed to pay for them.
For the market, an inflation outlook that sees near-term moves higher is only a further indication that the Fed will feel the need to raise rates. Market expectations of when the Federal Reserve will make the first move away from its Zero Interest Rate Policy (ZIRP) still sit over a year from now. Any clue that price increases are set to quicken will bring the front-end of this curve higher and the dollar with it.
We can expect some hawkish language in Wednesday’s FOMC minutes too, following changes to the Fed’s language about the downside risks to the US economy. Wednesday’s minutes may give us a quick shot of what Yellen will focus on during Friday’s speech but we expect that the dollar’s path will not be swayed too far.