ETFs largely unmoved by Jackson Hole speech

Aug 30th, 2016 | By | Category: Alternatives / Multi-Asset

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The case for raising US interest rates has “strengthened”, the chairwoman of the Federal Reserve has said.

ETFs largely unmoved by Jackson Hole speech

Janet Yellen, Chair of the Board of Governors of the Federal Reserve System. (File image)

Speaking at the Fed’s annual mountain retreat meeting at Jackson Hole, Wyoming, Janet Yellen was cautiously positive on the US economy.

She said “the US economy [was] now nearing the Federal Reserve’s statutory goals of maximum employment and price stability” and that economic growth and a healthier labour market meant “the case for an increase in the federal funds rate has strengthened in recent months”.

Yellen’s comments have not come as much of a surprise, however. There has been a growing expectation among investors and economists that US interest rates will rise this year. Some are speculating that the next increase from the Federal Open Market Committee (FOMC) could come as early as next month, but the consensus is for some time later in the year.

Lee Ferridge, head of multi-asset strategy at State Street Global Markets North America, said: “Despite recent hints of an ongoing policy rethink at the FOMC, Janet Yellen’s Jackson Hole speech did not break much new ground. Her comments could help arrest the dollar’s recent decline and deal a blow to the rally in risky assets that we have seen in recent weeks. A move at the September meeting remains less likely but a move before year end now looks a distinct possibility should US data continue to improve.”

Viktor Nossek, Director of Research at exchange-traded fund issuer WisdomTree Europe, said: “Jackson Hole has done nothing to trigger a rate hike in the US. While Janet Yellen has said the case for an increase in the federal funds rate has “strengthened”, demand-led data spurring inflation – which has been one of the causes of the delay to further hikes – continues to be soft and tepid, and therefore there is little reason for the Fed to act in September.

“There is no longer robust economic growth or population growth to support tighter monetary policy action in the West and this increases the stakes when it comes to plotting the route back to normalisation through setting higher rates of inflation and interest rates. Indeed with policy rates so low, the weak growth figure – which today was revised down to 1.1% for Q2 – means the downside risk of hiking too early is simply too great.

“What needs to change to prompt a hike? The missing driver for sustainable inflation is labour market tightening and that hasn’t happened because wage growth – at 2.6% yoy – is still falling short of the levels seen prior to the financial crisis when it was well above 3% yoy. Until the labour market in the US turns red-hot, the risk of inflation weakening following a rate hike would put the Fed in the difficult position of having to fight it with less room for policy easing. It is therefore better to delay and risk high inflation that leads to subsequent further rate hikes than pre-emptively trying to contain current price pressures that so far have posed little to no risk to the US economy.”

He added: “With Kuroda, the head of the Bank of Japan, also present, the meeting at Jackson Hole concluded with one important lesson from Japan:  It is easier to fight inflation than it is to fight deflation.”

Nitesh Shah, Research Analyst at ETF Securities, commented: “Investors expecting a strong signal about the Federal Reserve’s course of action over the coming months were disappointed. At the annual Jackson Hole Symposium, the Fed’s Chair essentially towed the central bank’s line that it remains data dependent.”

He added: “Her speech was more focused on how the central bank’s toolkit has changed since the financial crisis and that the expanded toolkit can weather through the next storm, whenever that arrives. She views the new tool kit as sufficient, even if we are in a lower natural interest rate environment (with some potential modifications, such as buying a wider range of assets under quantitative easing). However, it is clear that that capacity of the Fed to do all the heavy-lifting again is limited. She suggested that Congress also needs to play its part in providing fiscal stimulus in the next crisis. Additionally, to raise productivity (as a measure to limit the risk of a crisis), she suggests more education. It seems like most of the hard work will need to take place outside of the Federal Reserve.”

ETFs were fairly quiet following the speech, with few major moves directly triggered by Yellen’s comments.

ETFs tracking the US utilities sector, such as State Street Global Advisors’ $8 billion NYSE-listed Utilities Select Sector SPDR ETF (XLU) and its LSE-listed equivalent SPDR S&P US Utilities Select Sector UCITS ETF (SXLU), were perhaps the most obvious casualties of the speech, falling around 2.5% in USD terms. Utilities firms tend to be sensitive to interest changes and typically underperform in rising-rate environments.

US-dollar linked ETFs, which typically react to changing interest rate expectations, were largely unmoved. ETF Securities’ ETFS Bullish USD vs G10 Currency Basket ETP (LUSB), which provides investors with a long exposure to the USD relative to a basket of G10 currencies, weakened slightly by 12bps, while the PIMCO US Dollar Short Maturity Source UCITS ETF (MINT), which invests in a diversified portfolio of short-term USD-denominated fixed income instruments, rose 2bps.

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