Citi’s FX guru Steven Englander has a great couple of paragraphs ahead of Bernanke’s Jackson Hole speech tomorrow.The gist is that everyone he talks to think that A) The speech won’t reveal much and that B) regardless of what the Fed will do, everything will be fine.
Of course, these leaves open the possibility of a total shock.
What is interesting is that very few of the people we meet or talk to think that the currency or asset market outcomes will be very different under these scenarios. Perhaps this is because almost no one feels that QE3 will accomplish much in terms of stimulating real activity (if you see an angle by which QE3 will make a first order difference, let us know). So while equity markets have been flat the last 10 days, and risky currencies (other than the EUR) have been sold to a very modest degree, gold has done well. One interpretation is that QE expectations are acting on paper currency alternatives, rather than cyclical assets.
The question we find ourselves struggling with the most is what would constitute positive and negative surprises, given the investor orientation. The sense in the market seems to be that everything will be ok no matter what the Fed says. The possibility that the Fed says ‘there is little more that we can effectively do’ is viewed as trivially low. The possibility that they outline direct measures beyond QE3 is not quite as trivially low but not large either. There is also the possibility that the prospect of QE3 is better than anything the Fed can deliver, so selling the sizzle will continue to be the policy. Our concern is that the recent resilience of risky currencies and asset markets to bad news will fade. The upside is that long risk positioning does not seem heavy, but we still see the risk that market emphasis will shift from mediocre growth rescued by supportive policy to mediocre growth accompanied by ineffective policy.
Anyway, reminder: The speech is at 10:00 AM tomorrow. We’ll be covering it here LIVE.
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