Market 08/25: "Long way to go" - the frightening statement of Jerome Powell

Market reacts violently after Powell's indecisive statement

The market entered this morning's trading session with quite tense sentiment despite a slight recovery in last night's futures session, with most positions of CTAs (commodities trading advisors) and Quant Funds continuing to be short.

With forecast from GS showing large volatility in the market with amplitude >1 standard deviation fluctuation that could lead to more than $50 billion in selling flow from CTAs.

The above event partially occurred this morning. After Powell neither confirmed nor denied the rate hike next month, the market had a strong shorts-cover rally wave, largely based on the unexpected drop in volatility that crushed the amount of short-term puts in a low liquidity environment before long-term hedge demand returned to dominate the market.

SPX and QQQ then found support at important gamma levels at 4350 and 360 as mentioned in yesterday's article, helping the market stabilize temporarily today and forcing short-term puts to cover.

Overall, the activity of CTAs today and over the past week continues to be risk-off here.

Jackson Hole Conference - Not much revealed about policy issues

On the morning of Friday 08/25, the Jackson Hole conference took place, attracting the attention of most investors regarding interest rate prospects.

Some key highlights:

Fed is ready to continue raising interest rates if necessary.
All decisions to raise or cut interest rates are made cautiously.
Fed does not change the 2% inflation target.
If the labor market does not loosen, will respond with monetary policy
Growth trends could lead to higher interest rate hikes.

It can be seen that this event did not reveal too much about policy issues due to:

Fed has reached the end of the tightening cycle, cautious in policy adjustments.
FOMC is increasingly divided.
Yields and FX did not fluctuate strongly.

UMich late August inflation expectations survey: Consumer sentiment index reaches 69.5

Inflation expectations for next year rise to 3.5% (a significant increase from the preliminary report of 3.3%). Long-term inflation expectations at 3.0% for the third consecutive month, up from the preliminary forecast of 2.9%.

Consumer sentiment index drops to 69.5 after strong increases in recent months.

Long-term inflation-linked bonds are on track to suffer the strongest monthly decline this year

Despite price pressures, long-term TIPS are on track to suffer the strongest monthly decline this year. The $8 billion auction for 30-year debt at a time when this tenor's yield hit a peak in over a decade, even as yields fell after a poor PMI report.

30-year TIPS yield rises above 2% for the first time since 2011, while the 10-year tenor yield finally reached 2% on Monday, the highest since 2009.

JPY replaces bonds as the important factor for BOJ policy adjustment

Over the past 7 months, the yen has experienced stronger weakening than any other major currency, currently trading around the level where Japan had to intervene in the market last year.

In February, BOJ quadrupled the fee, making it more difficult for investors to borrow bonds for shorting. In addition, BOJ's decisions in December and July to loosen controls on the bond market have also significantly increased investment activity.