Down the Jackson Hole

Will Thursday's speech from Powell at the Fed's Jackson Hole virtual symposium be the watershed towards a new type of monetary policymaking? Will it re-write the rules on inflation targeting? CFTC positioning data was little changed but continued to show euro longs near a record. More on the Fed below, but note that in today's SPX session, as many as 76% of members are advancing, which is twice more than last week. The chart below shows the % of Nasdaq members above their 50 DMA fell from 90% to 70% over the last four weeks. Last week's Premium short in NASDAQ was stopped out, but Ashraf says 11700s is the temporary high before the next 400-500 pt drop. Moments ago, a new FX trade based on a Triple Confluence was issued for Premium subscribers. 

The Jackson Hole symposium will be held virtually this year but it will be no less of an event for market participants. Powell's topic will be the Fed's long-run framework and specifically, shifting towards average inflation targeting.

Currently, the Fed aims to hit 2% inflation and if it undershoots, it tries again. A new regime could see the central bank overshoot to make up for lost ground.

The hope is that it will act as a natural stabilizer that signals easier policy for longer, without all the complications of forward guidance.

It's fraught with pitfalls. At the heart of the Fed's thinking is that it believes it can control inflation if/when it returns. It's as simple as raising rates and at the moment, the Fed doesn't see the risks of rising prices.

Yet officials don't need to look any further that US housing for an inflationary jump that few saw coming.

“The housing market is past the recovery phase and is now in a booming stage,” said Lawrence Yun, the chief economist of the US National Association of Realtors on Friday after a record jump in existing home sales.

The Fed is right that it has the tools but the Fed has always had the tools to curb inflation and it's arrived many times. Why? Political risks is a big one. It's simply hard to raise rates and demand that all borrowers pay more. With Wall Street firmly in control of the Fed and increasing politicization at the Fed (and everywhere else), we would argue that long-term risks are higher than they've been in a generation.

CFTC Commitments of Traders

Speculative net futures trader positions as of the close on Tuesday. Net short denoted by - long by +.

EUR +197K vs +200K prior

GBP +7K vs -3K prior

JPY +21K vs +27K prior

CHF +15K vs +17K prior

CAD -34K vs -30K prior

AUD -3K vs -1K prior

NZD +4K vs 0K prior

The recent rally in the pound appears to have caught the speculative market by surprise and that leaves plenty of fuel for the fire. Expect a slow burn with the never-ending Brexit saga as a constant headwind.