Looking For The Signal? Expect No Fresh Help From Yellen And Draghi At Jackson Hole

There are four main issues that investors will be wrestling with in the week ahead.  First, as we saw before the weekend, geopolitical developments can still roil the markets.  Second, economic data from the US, Europe and Japan has been disappointing.  This has helped extend the rally in the bond and stock markets.  

Third, the euro was fairly resilient, unable to take out the August 6 low last week. The dollar remained in the upper end its four-month trading range against the yen, even though US yields fell to their lowest level in 14 months. 

Fourth, in light of the recent economic developments, the Kansas City Federal Reserve’s Jackson Hole confab at the end of next week, is hoped to generate new insight into the thinking of policy makers. Both, Fed head Yellen and ECB’s President Draghi will speak there on August 22.  

Geopolitics

There are three geopolitical flash points on investors’ radar screens:  Gaza, Iraq and Ukraine.  There have been some encouraging developments that suggest near-term stabilization in Gaza, though the basis for a sustainable and politically viable resolution still does not appear at hand.  Moreover, once again, though, in a different way, Israel’s deterrence doctrine appears to have failed again.  It is this failure of deterrence that then requires Israel forces to act in ways ensures that its military victories lose in the court of public opinion.  

The inability to protect the territorial integrity of Iraq has seen the conflict escalate there.  Outside of a brief market reaction when the US decided to strategically bomb part of Iraq to slow the advance of the ISIS insurgents and/or to defend US personnel, this conflict has generally not had much-direct impact on the capital markets.   One dimension of this conflict that continues to appear under-appreciated in the media is the role of the larger Saudi Arabia-Iran confrontations through proxies.    

Of these geopolitical flash points, the situation in the Ukraine stands out.  Russia is integrated into the world economy as both a customer and energy provider, especially in Europe. A disruptive impulse will hit an already fragile economic situation in the euro area. It can only add to the downside risks to growth and prices. Developments remain fluid amid conflicting media reports.  However, despite that some observers interpreted at conciliatory by Putin, it seems clear that he has not abandoned his goal of destabilizing Kiev and carving another piece out of Ukraine.  

Economic Data

US:  The highlight of the week is the July CPI figures on August 19.  The consensus expects the headline rate to tick down to 2.0% from 2.1% and the core rate to be unchanged at 1.9%.  We place the risk on the upside.  The rental market is tight, and this may translate into higher core prices.  Medical care costs may be rising, and to filters into core prices.  In addition to the CPI, the US reports housing starts.  In June, the seasonally adjusted annualized rate fell below 900k for the first time since September 2013.  They are expected to have rebounded in July.  On the other hand, existing home sales, reported later in the week, trended up in Q2 after weakening in Q1.  They may pullback in July.  Lastly, following the disappointing Empire State August Survey (14.69 from 25.60; the consensus forecast was 20.00), this week’s Philly Fed survey will also draw attention.  Some economists have already revised down Q3 growth forecasts; more may follow.