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Investing.com -- In a note to clients Thursday, Wolfe Research analysts warned that Federal Reserve Chair Jerome Powell could deliver a hawkish message at next week’s Jackson Hole Symposium, potentially unsettling equity markets.
Following Tuesday’s slightly hotter-than-expected Core CPI reading, the analysts said they expect today’s July Producer Price Index to be “highly watched” because some components feed into the Fed’s preferred inflation gauge, the PCE Deflator, later this month.
“Markets have surprisingly reacted favorably to hotter inflation thus far,” Wolfe said, noting that Fed funds futures still price in about 2.5 rate cuts by year-end.
With U.S. stocks continuing to hit record highs, Wolfe argued the symposium could be “a chance for Fed Chair Powell to take a hawkish stance on interest rate policy.”
The firm said the annual Jackson Hole gathering has historically been an opportunity for Powell “to reset expectations and reiterate the central bank’s stance on monetary policy.”
After the CPI report showed “stickier Core Services Ex. Housing and Core Goods components contributing more to the rise in inflation,” Wolfe sees “risk of the Fed potentially cutting fewer times than market expectations.”
The analysts cautioned that the event could be “a potentially negative event for stocks” and reiterated their recommendation for “barbell positioning” in portfolios, balancing exposure to both defensive and cyclical assets.
Wolfe added that inflation pressures remain “hiding in plain sight” and that investors should prepare for the possibility that the Fed’s path toward easing may be more gradual than markets currently anticipate.