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Jackson Hole looking increasingly hawkish

  • SPY performs strongly on Thursday ahead of the Jackson Hole meeting.
  • Recent Fed speakers have been notably hawkish.
  • SPY remains poised to attack the 200-day moving average.

Jackson Hole will finally give markets some clarity later on Friday when Fed Chair Powell gives his remarks on the outlook for interest rates. After a supposed Fed dovish pivot earlier this month, equity markets went on a large relief rally. This was exacerbated by the relatively light positioning of fund managers and hedge funds who then had to chase the rally and cover shorts. Recent data from Wall Street shows the short covering has ended and hedge funds have begun to add short positions. Fund managers remain underweight equities though. 

SPY news

PMI data this week has been poor, and yields have risen as several Fed speakers came out somewhat hawkishly this week in comments. The continued surge in energy prices in Europe and oil moving back to higher levels has also caused bond yields in the US to move higher. We feel it is further out the curve that the damage may be done following Jackson Hole. The market pricing of a sudden interest rate cut in the first half of 2023 always looked a bit optimistic.

Below we have eurodollar interest rate futures for December 2022 versus December 2023. Previously the spread was over 75 basis points, meaning interest rates in December 2023 were forecast to be 75bps lower than December 2022. Now pricing has narrowed this spread to just 37bps, meaning higher rates throughout 2023. This is key in long-term fund managers’ investment decisions. It will affect their allocation to bonds versus equities. It also impacts equity valuations when discounting future cash flows, so it should lead to larger equity valuations and allocations. That’s the theory, anyways!


SPY forecast

Irrespective of the long-term prognosis for rates and equities, this Jackson Hole melee will give us some short-term volatility and positioning still leans toward a rally of sorts. The market will mold the narrative to do what it wants to as we expect Powell to be reasonably vague. The gap to $421 looks like it will be filled, and that would then lead to a new test of the 200-day moving average at $430. Breaking below $410 ends any bullishness in our view and could lead to fresh yearly lows.

SPY daily chart

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