Mr. Powell’s dovish tone precipitated a move higher for stock index futures, especially in contrast to several Federal Reserve officials at the time who were voicing their preference for a near-term tapering rather than an end of the year tapering. Prior to the Jackson Hole Symposium there was a consensus view that a tapering could be announced sooner rather than later. The thought process is that anything that puts downward pressure on interest rates, as would be the case in the event of a later rather than sooner tapering, is considered to be bullish for stock index futures (Chart 1).
STOCK INDEX FUTURES AND CENTRAL BANK TAPERING
Federal Reserve Chairman Jerome Powell at the August virtual Jackson Hole, Wyoming, Federal Reserve Symposium indicated the long awaited tapering of the Federal Reserve’s monthly purchases of $120 billion of Treasury and mortgage-bond securities could take place later this year. Analysts interpreted Mr. Powell’s comments to be a bit on the dovish side since Mr. Powell suggested policymakers will only gradually cut back on asset purchases, and that the Federal Reserve is still a long way from raising interest rates.
Chart 1: S&P 500 Futures - Weekly
Stock index futures held up well despite several Federal Reserve officials recently saying they could begin reducing their monthly purchases of bonds by the end of this year if the economy performs as they anticipate. Philadelphia Federal Reserve Bank President Patrick Harker is the latest official to say he would support the start of tapering this year following Dallas Fed Bank President Robert Kaplan who reiterated his support for starting to taper the Fed’s asset purchases in October as long as there are no fundamental changes to the outlook. There were similar comments from New York Fed Bank President John William when he said “it could be appropriate” to begin tapering before the end of the year.
Some analysts pushed back expectations for when the Federal Reserve will begin reducing bond purchases after a recent disappointing U.S. payrolls report, the sharp deterioration in consumer sentiment as tracked by the University of Michigan and the smaller than estimated increase in the U.S. consumer price index. Overall, in recent months stock Index futures have been only intermittingly and temporarily pressured by talk of tapering.
Stock index futures showed little reaction when the European Central Bank at its September 9th policy meeting left interest rates at record low levels but announced it would start conducting a moderately lower pace of asset purchases for the rest of the year. The central bank said the Pandemic Emergency Purchase Programme will be maintained at €1.85 trillion until at least the end of March 2022 but gave no signal of its next policy move, including how it might dismantle the Pandemic Emergency Purchase Programme.
Source: Chart from QST
ECB President Christine Lagarde said the ECB’s decision doesn’t represent a move to phase out its bond purchases but simply is a realignment to the improved economic developments, and that the bank will remain committed to easy-money policies for years. Many traders saw this as a token step towards unwinding the emergency economic aid it put in place during the pandemic.
16 | ADMISI - The Ghost In The Machine | Q3 Edition 2021
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