MBS Live Day Ahead: J-Hole Doesn't Really Matter
I've waited until the day itself to abbreviate the Fed's Jackson Hole symposium with the beloved "J-Hole." Pretty impressive considering how much fun it is to type/say "J-Hole." For instance, if anything happens today that's bad for bonds, we can say in a resigned, sarcastic tone: "way to go J-Hole..." Conversely, if it's bond-market-positive, we could genuinely exclaim "way to go, J-Hole!"
But I think that the chances of either outcome are slim. There are general reasons and schedule-specific reasons. With the schedule in mind, consider that Draghi doesn't even begin his speech until the 3pm bond market close. To be fair, 3pm is the traditional closing bell, tied to CME pit trading. There will still be another 2 hours of electronic trading, but those 2 hours are the easiest to forget in the following trading session (look at a 5-day chart and take note of several 3pm-5pm moves being quickly erased the following morning, like clockwork).
Yellen speaks earlier (soon actually), but now we come to the "general" reason that I'm feeling fairly dismissive about J-Hole this year. Bottom line: what's Yellen going to say that we don't already know?!
Let's see...
- Fed wants to start trimming balance sheet.
- Yep, we know
- Fed probably wants to try and hike again this year
- OK, got it
- Fed is concerned about recent inflation trends, but sorta maybe expects those to be bottoming out and slowly reversing course
- Yes, Fed. You've said this as well
- Fed isn't pricing in fiscal concerns although if they materialize, it could impact monetary policy
- Well, of course!
The point is that the Fed has been more transparent lately than it's ever been--by a wide margin. Various Fed speeches have served to almost perfectly foreshadow the official policy announcements. Yellen would have to fire arrows yet unseen in order to surprise markets.
As for "surprising markets" and any potential of big movement today, things are a bit tricky. I would wager that if J-Hole were occurring during active trading in the Fall or Spring that I could guarantee you no major market movement today. I can still guarantee you that's the baseline goal for most traders. But with fewer traders actually pushing buttons today, it won't take as much of an imbalance between buyers and sellers to move markets (imagine 2 sellers vs one buyer as opposed to 20 sellers vs 30 buyers).
What about Draghi? Isn't he a big deal given that he caused the June sell-off and that his subsequent comments helped bonds find their footing? Aren't we at risk of bonds bouncing because we've already unwound that initial Draghi-inspired sell-off?
Yes and no. Although 10yr yields in the US are pretty much back to pre-Draghi levels from mid-June, German Bunds (the European 10yr benchmark) definitely aren't.
Moreover, the timing of Draghi's speech means there really won't be anyone around to trade it. Worst case scenario, that leaves 3 sellers and 2 buyers (figuratively). In simpler terms, yes, Draghi could still move markets at that time of day, but it would be for the same reasons that Yellen could move markets this morning. It would require a combination of unexpected comments and the right mix of traders still being in the office.