What Fed Chair Jackson Hole Speech Entails for Equities and Bitcoin?

This week, we will be expecting a big event which is Fed Chair Powell ’s speech at the Jackson Hole Economic Symposium at 10 a.m.(ET) on Friday (23 August).

Market is expecting him to clear the path for a rate cut in September, but we would not be able to know the size of the cut. The interest rate expectations have inched back to where they were prior to the 02 Aug jobs report, which caused intense recession fears and inspired some calls for the Fed to immediately lower rates in a rare emergency move; the odds of a 25 basis-point cut on 01 Aug was 78% compared to 22% for a 50 basis-point cut.

So we could expect Fed Chair to comment that they are getting more confident that inflation is moving towards their target, and that they can afford to loosen the degree of monetary restrictiveness. But we need to remember that there is still much data to come; August inflation and payrolls as well as four more jobless claims.

The market-implied odds of a single 25 basis-point cut to the target federal funds rate at the Fed’s Sept. 17-18 meeting rose to 52.5% by mid-morning Monday, according to the CME Group’s FedWatch Tool, pricing in a move from the 5.25% to 5.5% range rates have sat for the last 13 months down to 5% to 5.25%.

The probability of a 50 basis-point cut is now 32.5%, according to CME Group data, which tracks trading of futures contracts speculating on the direction of monetary policy.

That is a reversal from a week ago, when the odds of a 50 basis-point cut was 53% and of a 25 basis-point cut was 47%.

While we might see policymakers signalling their intention to return the rate hike this year, we might only see one quarter-point rate cut. So what we need to understand is how S&P 500 and NASDAQ would move after we experience the first rate cut.

So now if we were to calculate the 6 months after rate hike in July 2023, in January, we saw the Dow Jones Industrial Average rose 1.3%, the S&P 500 advanced 1.7%, and the NASDAQ added 1.0%. Large-caps fared better than Small-caps in January–the Russell 1000 index increased 1.4%, while the Russell 2000 dropped 3.9%.

So are we going to see similar gains 6 months after the rate cut if it ever happen in September 2024?

But if we were to look at how the past Fed rate pivots goes, it usually provide a runway for a strong S&P 500 gains. So could we be seeing S&P 500 breaking into a new highs at the end of September?

Crypto markets have showcased a strong comeback in the past two days, allowing altcoins to recover significantly after weeks of decline. This surge comes in anticipation of Federal Reserve Chair Jerome Powell’s forthcoming speech at the Jackson Hole symposium. Investors are also eyeing the release of minutes from the Federal Open Market Committee (FOMC) meeting, which could signal a pacifist stance from the Fed.

Market observers are keenly awaiting insights from this influential gathering. Of particular note, Federal Reserve Chair Jerome Powell is scheduled to address the assembly Friday morning.

We might be expecting Fed Chair not to provide the size of the rate cut, but we could see a clear path for the rate cut in September and the bounce-back in the market is a reflection of the relief that the economy is not falling into a recession.

Last week’s drop came after a long period of sideways movement but it looks like the pair hit an invisible wall. After the drop, BTC/USD traded completely sideways but this looks to be just the calm before the storm.

We could be seeing a strong bounce from Bitcoin to move towards the $70,000 mark.

The Relative Strength Index (RSI) is near the oversold and if we compare the last trough (at $54,000, where the bullish trend line originates), with the current one, we can see there is bullish divergence: the price is making a higher low and the RSI is making a lower low. This is a sign that a move north will follow; however, the timing is tricky.

So we might still see Bitcoin trading sideway for a while before we see a strong bounce back signal.

As GDP growth is tracking at about 2% this quarter. 2% is virtually the Fed’s estimate of the neutral GDP growth rate. With the economic data we have seen so far, I believe we could be expecting Fed Chair to provide a clear path for a rate cut in September, but the size of cut would not be known.

And Fed Chair would still remark that they need more data especially the August inflation and payrolls as well as four more jobless claims to confirm more rate cut, though Fed would be more confident that inflation is near their target and the degree of monetary restrictiveness can be afford to be loosened.

Appreciate if you could share your thoughts in the comment section whether you think a clear path to rate cut in September would be provided and indication for more cut this year?

Disclaimer: The analysis and result presented does not recommend or suggest any investing in the said stock. This is purely for Analysis.