The Market Is Totally Unprepared For A Surprise From The Fed

3 weeks ago 15
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Traders have been talking about the Kansas City Fed’s Jackson Hole economic symposium for months now, and as the big day arrives, there is one word to describe financial markets: complacent.

The Cboe Volatility Index, the informal fear gauge for the stock market, remains subdued, more than 50% below its levels ahead of the U.S. election.

It isn’t just the stock market that is asleep. The ICE BofAML Move index, a measure of U.S. interest-rate volatility, is below July’s peaks, and less than half the levels when Covid-19 struck the Western world. Volatility in the currency market is similarly depressed.


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That lack of volatility is a bit of a double-edged sword for the Fed’s policy makers. The half-full argument is that the central bank, despite a cacophony of voices, has by and large successfully communicated its intended course to financial markets. The half-empty argument is that the risk of violent moves in financial markets is great given this complacency.

The world’s financial markets are convinced that Federal Reserve Chair Jerome Powell is not about to throw a curveball when he steps up to the microphone on Friday.

That means, Powell will reiterate the central bank’s plan to reduce bond market purchases but not formally announce the end of the program. If markets are wrong, the fireworks will be something to behold.

Steve Goldstein

*** Join Barron’s senior managing editor Lauren R. Rublin, deputy editor Ben Levisohn, and Charles R. Dreifus, portfolio manager and managing director for Royce Investment Partners Monday at noon to discuss what’s ahead for financial markets. Sign up here.

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Economists Looking to Powell’s Jackson Hole Speech For Fed’s Thinking

Federal Reserve Chairman Jerome Powell in his Jackson Hole, Wyo., keynote on Friday will try to balance concerns that the Fed isn’t taking inflation seriously enough with newer risks from the Delta variant, including rising cases that forced the economic summit to switch last-minute to a virtual format.

  • Powell’s much-anticipated speech, at 10 a.m. Eastern time, comes as economic growth appears to have peaked, after reports that Fed committee members are divided on the recovery, and as the Delta variant threatens to dash next month’s back-to-school and back-to-work plans.
  • Investors will be listening for an update on the Fed’s plans to wind down the roughly $120 billion in monthly Treasury and mortgage-backed securities purchases it launched in response to the pandemic.
  • Joe Brusuelas, chief economist at RSM, said the Fed’s note in its July meeting minutes that “no decisions regarding future adjustments to asset purchases were made at this meeting,” was a sign that Fed watchers shouldn’t expect much on tapering plans from Jackson Hole.
  • Meanwhile, U.S. jobless claims ticked up slightly to 353,000 last week, but the four-week moving average fell to a new pandemic low, the Labor Department reported Thursday. Unemployment applications have dropped more than 50% since the start of 2021.

What’s Next: Fed officials last month were split on when and how aggressively to begin tapering bond purchases. Some economists who had expected a November announcement now think 2022 is looking more likely.

Lisa Beilfuss and Janet H. Cho

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Biden Promises to Make Terrorists Pay for Attacks as Evacuations Continue

President Joe Biden pledged retribution for the attacks outside Kabul’s international airport in Afghanistan that killed 13 U.S. troops and dozens of Afghans, and promised to continue evacuation efforts. “We will hunt you down and make you pay,” Biden said Thursday.

  • Two suicide bombs and gunfire ripped through crowds gathered outside the airport, including Afghan allies who had helped the U.S. and were trying to flee the Taliban before the Aug. 31 evacuation deadline. The Pentagon said ISIS-K, the Afghan affiliate of Islamic State, was responsible.
  • “While we are saddened by the loss of life—both U.S. and Afghan—we’re continuing to execute the mission. Our mission is to evacuate U.S. citizens, third-country nationals, Special Immigrant Visa-holders, U.S. Embassy staff, and Afghans at risk,” CENTCOM commander Marine Corps Gen. Kenneth F. McKenzie Jr. said.
  • Since Aug. 14, the U.S. and its coalition partners have evacuated more than 104,000 people, including about 5,000 Americans. The U.S. estimates that around 1,000 Americans remain in Afghanistan after the Taliban overtook the country this month.
  • The Taliban are a sworn enemy of Islamic State, and shot dead one of its top leaders in Afghanistan hours after taking over the Kabul prison where he was held, The Wall Street Journal reported. The two Islamist groups have fought each other in Afghanistan since 2015.

What’s Next: Biden, who had previously promised to evacuate every American who wanted to leave Afghanistan, said the U.S. will find ways to extract those it can’t reach by the Aug. 31 withdrawal deadline. He also said some Americans with dual citizenship or extended family say they don’t want to leave.

—Janet H. Cho

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China Mulls Ban on Big Tech Groups’ Foreign IPOs

The Chinese government is considering imposing a ban on foreign listings for companies that control large amounts of sensitive consumer data, The Wall Street Journal reported Friday.

  • China’s stock market regulators in recent weeks informed some companies and foreign investors of the plan, which would mostly target the country’s large internet or e-commerce groups, according to the report.
  • Companies holding less sensitive data, such as pharmaceuticals groups, would still be allowed to list on foreign markets.
  • The plan would target the vehicles often used by Chinese groups to list abroad, via complex schemes designed to evade restrictions on foreign investments.
  • Beijing would also set up a special government body whose authorization would be required before a company can seek an initial public offering abroad, according to the Journal.

What’s Next: In recent months, Beijing has launched several cybersecurity reviews into the largest internet companies already listed in New York, such as ride-hailing company Didi Global. The new regime could be implemented before the end of the year, and the Chinese government is said to have asked companies to hold off on foreign public listings for now.

Pierre Briançon

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Tech Leaders Pledge Billions to Strengthen Cybersecurity

Tech company leaders have pledged billions of dollars to strengthen cybersecurity, work toward new industry standards, supply businesses with stronger security tools, and train workers in cybersecurity jobs after meeting at the White House this week.

  • The focus comes after several high-profile cyberattacks against a range of companies from government software contractor SolarWinds to oil pipeline operator Colonial Pipeline.
  • Google, owned by Alphabet, is investing more than $10 billion over five years to improve cybersecurity and pledged to train 100,000 Americans for technical jobs in information technology support and data analytics.
  • Microsoft committed $20 billion over five years for more security tools, and $150 million to help government agencies upgrade their security and expand cybersecurity training partnerships.
  • IBM will train more than 150,000 people in cybersecurity skills in three years, and work with more than 20 historically Black colleges and universities to start Cybersecurity Leadership Centers to better diversify the workforce.

What’s Next: The Biden administration said the Commerce Department’s National Institute of Standards and Technology will work with industry and other partners to develop a plan to improve the security and integrity of the technology supply chain.

Janet H. Cho and Liz Moyer

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Peloton Cuts Price of Bike and Reports Wider Quarterly Loss

Peloton Interactive plans to slash the price of its bike again. The company also reported a wider-than-expected quarterly loss, and said it expects slower growth for its equipment and subscriptions as pandemic-related demand wanes. The stock skidded in extended trading.

  • The digital fitness firm that sells bikes and treadmills that sync up with its $39.99 a month membership is lowering the price of its flagship bike to $1,495 from $1,895. Nearly a year ago, the price of its bike was lowered by $350 when the company launched its higher-end Bike+ for $2,495.
  • The company hopes the lower price expands Peloton’s addressable market. CFO Jill Woodworth also said in the company’s earnings call that it has significantly lowered the costs of manufacturing each bike over the years.
  • Peloton also reported a fiscal fourth-quarter net loss of $1.05 per share, wider than the 44 cents a share analysts had anticipated, according to FactSet. Sales of $937 million were above consensus estimates at $928.6 million.

What’s Next: Peloton plans to launch its lower-price treadmill in the U.S. on Aug. 30. The company expects overall sales of $800 million in the fiscal first quarter, well below the $1 billion that analysts have previously forecast.

Connor Smith

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Do you remember this week’s news? Take our quiz below about this week’s news. Tell us how you did in an email to thebarronsdaily@barrons.com.

1. New-home sales in the U.S. rose for the first time since March despite the median new-home price increasing to what?

a. $250,250
b. $390,500
c. $430,750
d. $500,000

2. Starting in November, Delta Air Lines will charge its unvaccinated workers a monthly health-insurance surcharge. How much will it be?

a. $50
b. $200
c. $500
d. $1,000

3. President Joe Biden met with executives of technology, financial, and energy firms on Wednesday for a cybersecurity summit. Which CEO wasn’t present?

a. Apple’s Tim Cook
b. JPMorgan Chase’s Jamie Dimon
c. Amazon’s Andy Jassy
d. Twitter’s Jack Dorsey

4. Visa paid $150,000 worth of the cryptocurrency Etheruem for an NFT, or nonfungible token. What was its name?

a. Cryptopunk
b. Beeple
c. Sparky
d. None of the above

5. With a $250 million asking price, an under-construction megamansion is now the most expensive home on the U.S. market. Where is it located?

a. San Francisco
b. Miami
c. Los Angeles
d. San Jose

Answers: 1(b); 2(b); 3(d); 4(a); 5(c)

Barron’s Staff

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—Newsletter edited by Liz Moyer, Mary Romano, Callum Keown, Rupert Steiner

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