Cautious Trading Ahead of Jackson Hole
Markets have settled into an uneasy calm ahead of several key economic events, including the US Federal Reserve's meeting at Jackson Hole. The combination of these events has left traders staring at screens with plenty of information but little invitation for action.
The recent drop in oil prices has pulled some inflation premium out of bonds and given long-end Treasury yields more breathing room. This has shifted market attention to the front end, where Kevin Warsh will take over as a speaker on Friday. While traders may be hoping for a policy thunderbolt, central-bank oatmeal is more likely, with Price stability, data dependence, vigilance, uncertainty being the expected talking points.
The focus of the dollar's recent strength has been attributed to Scott Bessent's enlarged Treasury buybacks, which have tightened the 30-year swap spread and pushed up bond yields. However, the market is now looking towards the Fed and the front end for cues, with ING noting a shift in attention.
The author remains cautious about trading ahead of Jackson Hole, preferring to wait for clearer signals before taking action. The yen has been identified as a more attractive option, given its policy divergence and softer oil prices, which have narrowed the policy gap that underwrote the yen carry trade.
While markets appear relaxed about the upcoming events, the author warns that low volatility ahead of known event risk is not the same as low risk. The market may be waiting for someone else to take action before making a move.