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Finland
- German IFO Business Climate Index expected to give back some gains
- Fed’s Janet Yellen to confirm slow but steady tightening
- ECB’s Mario Draghi rumoured not to adjust forward guidance
By Juhani Huopainen
Despite some relatively important economic data releases, today will be all about the two speeches at the Jackson Hole Symposium. Both the Federal Reserve’s chair Janet Yellen and the European Central Bank’s president Mario Draghi are not expected to make important announcements, but when expectations are low, reactions to surprise information will be violent.
In addition, Germany’s Q2 gross domestic production (0600 GMT) and US July durable goods orders (1230 GMT) are worth watching.
Germany August IFO Business Climate (0800 GMT). The Business Climate Index rose to a record high of 116 in July. This was the third new record high in a row. The median forecast sees the index a little bit lower in August, at 115.5.
The Markit’s Composite Purchasing Manager Index peaked in May, and fell in June and July. The Markit’s flash August index was published earlier this week, and against expectations of being unchanged from July, it surprised positively and actually rose.
This probably sets the real-time expectations for today’s data release a bit higher, but small differences really do not matter at this point. The German economy is humming along very well and there is widespread optimism. Even the 2017 elections look certain to get a market-friendly result.
Calm before the talk ... the topic for this year's Jackson Hole symposium is
'Fostering a Dynamic Global Economy'. Photo: Shutterstock
Jackson Hole Symposium The Jackson Hole Symposium is an academic event, but it is attended by heavy-weights who discuss the presentations and carry new thoughts back home. The symposium’s agenda has in the past reflected the current situation, and often the presentations have influenced the future policy.
The agenda has for the past couple of years concentrated on monetary policy and labour market dynamics – no surprise, as the policy response to the financial crisis was low, or even negative rates, coupled with central bank asset purchases.
This year, the Federal Reserve is already increasing rates, has ended asset purchases and plans to decrease the size of its balance sheet. The European Central Bank on the other hand is about to begin tapering its asset purchases. The period of ever-easier monetary policy is over, and the economic growth has to become sustainable without the central banks’ help.
This year, the topic is "Fostering a Dynamic Global Economy". The “fostering a dynamic economy” is self-explanatory, but the word “global” is probably important. The decision-makers know after the financial crisis that everything is interconnected, and no crisis remains isolated for long.
A crisis in Greece becomes a crisis for German banks, and together it becomes the euro crisis. Trouble in the private sector easily turns into trouble for the public sector. Managing the whole requires global or near-global backstops, mutual guarantees. Probably even wealth transfers, especially in the euro area.
Prerequisites for such mechanisms of redistribution are a common rulebook and a control function that makes sure that the rules are followed and reactions to brewing trouble come quickly. No country is willing or could afford to backstop other countries without such a system. This means that Jackson Hole 2017 will be all about regulation.
See also Saxo Bank’s chief economist & CIO Steen Jakobsen’s Jackson Hole 2017 is ‘all about regulation’.
By the time this article is published, the presentations from the symposium and the full agenda should be available here.
Federal Reserve’s chair Janet Yellen speaks (1400 GMT). Yellen’s term as the chair of the Fed ends in February. It is uncertain whether president Donald Trump will reappoint her for another term, or replace her with a new name of his. Gary Cohn, former CEO of Goldman Sachs, is one possible name.
Yellen is likely to present some rough ideas how the Fed should direct the economy, and also present some ideas on responsibilities that fall outside the scope of the Fed, such as fiscal policy and financial regulation.
That kind of speech would in effect be a job interview of sorts. By outlining what the Fed should do, she would present her line of thinking and plans to Trump, and perhaps get commitment from not only the administration, but also the Congress on what each is responsible for and should do.
On the other hand, even if she is replaced, outlining broad policy now could effectively lock her successor to the same path for a while. The Fed is like a ship – it turns slowly. The Fed avoids drastic changes, and this could mean that Yellen might influence policy far beyond her own term.
European Central Bank’s president Mario Draghi speaks (1900 GMT). Draghi is also in jeopardy as his term is about to come to an end. He is a realistic dove when it comes to the Eurozone, but being too dovish might influence the selection of his successor.
The last thing that Draghi would want is a strict anti-inflationist that would be worried about unconventional policies and mutualisation of risks. He will try to walk a very narrow path between sounding dovish enough, but not too dovish.
The ECB is about to commence tapering its asset purchases, probably from the beginning of 2018. The announcement is likely to come in the coming months, but not now. The ECB has leaked that Draghi will not present any changes to the forward guidance yet.
In June Draghi made a mistake by very carefully hinting at tapering. The market reaction forced him to backtrack almost immediately.
Most likely he will use the theme of the symposium to his full advantage and talk about how the euro area’s systems have to evolve. The European Monetary Fund and some sort of control functions are highly likely after the German elections are over.
Source : Trading Floor
