The threat to global growth from the Delta variant is weighing on sentiment, and it is also delaying central bank normalization. The RBNZ put off its expected rate hike last week after the country went on lockdown. And the FOMC is likely to delay any announcement of a QE tapering, which some had thought could be effected at this week’s Jackson Hole symposium, until later in the fall. Though if the virus and the tighter restrictions takes a bigger toll on growth than currently anticipated, normalization could be put off even longer.
Pressures on the BoE and BoK to tighten policy near term are also likely being reduced. Further complicating outlooks are building worries over the efficacy of the vaccines, with booster shots now being prepared. Supply shortages also are crimping production and sales and are adding to uncertainties over the economy. Now geopolitical risks are adding to the global unease.
The KC Fed’s annual Jackson Hole symposium is the highlight this week.
It lost a lot of its luster after it was announced Chair Powell would not attend in person but instead would webcast his remarks, though the Fed has now decided to make the meeting entirely virtual amid a covid outbreak in Teton County. Though the Fed has used this venue in the past to drop policy hints, and even though the July minutes indicated “many participants” favored reducing asset purchases this year, Powell is unlikely to give any clues. The minutes also revealed a wide mix of views on the path of the economy and inflation, not to mention QE, which suggests the Fed is not ready to make a decision. Officials will also want to see the July jobs report on September 3.
The view that there will be no hints over reducing asset purchases at this week’s meeting helped support Friday’s rally on Wall Street.
With the Jackson Hole meeting unlikely to produce any drama, attention will turn to data. After the divergent patterns seen in last week’s reports, attention turns to the upcoming numbers to help further frame market interpretations of the macro-indicators heading into the September 21-22 FOMC. Further negative impacts are expected from the rise in the Delta variant as seen in the big pullback in consumer confidence, though the surge in inflation pressures may have weighed also. Meanwhile, supply shortages have weakened producer sentiment too, and we could also see the bearish effects on production and sales due to various bottlenecks. The calendar includes home sales, durables, income, consumption, the second look at Q2 GDP, and consumer sentiment.
Geopolitical risks have added to virus concerns, although the central scenario remains that the impact of the pandemic and virus variants on activity in the US and Europe will be limited, thanks to high levels of vaccinations, with preparations for booster shots for the most vulnerable apparently already underway. Against that background, the minutes (Thursday) to the last ECB meeting will be interesting.
There the central bank strengthened its guidance on rates. Usually, the report doesn’t give too much away, but while Lagarde was eager to deliver a very dovish message on the rate outlook, she was very cagey on tapering and the future of the PEPP program. Some council members clearly are eager to start taking the foot off the accelerator at least a bit, although the final decision on PEPP, which is currently set to end in March next year, is unlikely to be taken before December.
