Jackson Hole: Market overreacts?

US equities are trading higher on Wednesday as lower 10-year US Treasury yields aid long-term technology sectors thrive.

The 10bps drop in 10-year yields is likely due to investors dialling back some of the recent build-up in growth expectations that saw yields climb to the highest levels since the Great Financial Crisis, as well as, and perhaps more importantly, an easing in Fed higher for longer expectations.

Even if the drivers of today’s change are partially international — weaker August services, for example, PMI releases in Europe continue to indicate to softer global economic forecasts. Indeed, modern market playbooks suggest that when interest rates fall, equities rise.

While retail profits are mixed at best, recent macro data (growth and labour market indicators) and a strong second-quarter earnings season have shown healthy momentum in the US economy. However, the rapid rise in 10-year US Treasury yields through August has likely baked in much of the good news, putting more emphasis on growth and inflation to keep short bond holdings in play.

The upcoming Jackson Hole Economic Symposium, which is due to begin later today, is poised to play a pivotal role in guiding global markets. While central bank policymakers will be consciously sensitive in order to keep everything on track.

Currently, investors’ attention is focused on China’s unfolding developments and the effectiveness with which Beijing is preserving its domestic currency. Notably, the USD/CNY pair’s approach to the 7.30 level has become a source of concern for Chinese officials. Given the PBoC’s preference and numerous capabilities, many FX traders believe the pace of CNY depreciation will remain moderate. Nonetheless, given the dropping rates and managed volatility, we believe the Yuan remains an appealing funding alternative for carry trades.

Governor Ueda of the Bank of Japan is scheduled to attend the Jackson Hole conference later this week. He might take part in the Saturday overview panel. Governor Ueda last addressed at the European Central Bank’s Sintra conference in June, prior to the YCC adjustment at the July BoJ meeting. This will be his first opportunity to discuss the YCC adjustment and its impact on Japanese rates and currency markets in a high-profile context.

In addition to the Iran problem, oil prices plummeted after the EU services moved into contraction territory, raising concerns that services will catch up to manufacturing PMIs internationally. With services accounting for 70% of total fuel demand, it’s a potential demand hit to keep an eye on.