Volatility Compresses Ahead of Jackson Hole and Powell Rate Scrutiny

Volatility Compresses Ahead of Jackson Hole and Powell Rate Scrutiny

There is top event risk on deck for the coming week including US housing data, August PMIs and the Jackson Hole Symposium. However, volatility is contracting and no theme seems to hold command.

Talking Points:

• Volatility measures across the financial spectrum reflect an distinct lack of fear of systemic themes as benchmarks like the S&P 500 hit new highs
• Themes like trade wars with vague scenarios and a penchant for surprise are being replaced with slow and well-signalled matters like slowing growth
• Top event risk this week includes US housing market health, August PMIs and the closely watched Jackson Hole Symposium

Volatility Compression Continues

There is a healthy amount of meaningful global macro event risk on the docket ahead, but its ability to trigger significant volatility in asset types and regional markets will likely be complicated by backdrop headwinds. Underlying market conditions continue to prove very sanguine. Risk trends continue to slowly climb higher with major global equity indices notching record highs this past week and volatility measures across asset classes progressively deflated. Further, there doesn’t seem to be an active fundamental ‘theme’ that is controlling the reigns of sentiment when provoked by meaningful updates.

Relative Trend and Volatility of Major Asset Benchmarks

 

Source: John Kicklighter 

A Rebound in Scheduled Event Risk but Reticence to Respond

Sure, there is potential in matters like economic activity in the aftermath of the US tariff shake out, questions around monetary policy and US central bank independence as well as various geopolitical issues burning across the globe; but none of these matters seems to be taking an active hand in guiding the broader trend – much less the day to day movement – of benchmarks like the S&P 500. Given our seasonal position (three weeks before the swell in volatility and volume associated with the end of the ‘summer doldrums’), it will be a higher bar to clear to generate the kind of heat necessary to spur a systemic move. It’s certainly possible, but we should set our expectations for probability. Calendar of Top Global Macro Event Risk

Calendar of Top Global Macro Event Risk

  

Source: John Kicklighter

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US Housing Market Reflects on Affordability, Wealth and Interest Rates

Looking out at the top event risk through the coming week, there are quite a few themes that will be covered; but my interest starts with the US housing market at the beginning of the period. On Monday, the NAHB House Price Index will give a good overview of an important concentration of wealth for the one of the largest growth-supporting bodies in the world – the US consumer.

As housing affordability continues to dominate the national conversation and supplies of newly produced construction rise to over 9 months, we see this particular measure dithering in recent months down near the lower end of its 70-year historical range. It is hard to believe that consumer sentiment (which recently struggled with the University of Michigan update) will improve materially with this most American of assets representing a weight on the collective.

Chart of NAHB Housing Market Index and US Recessions (Monthly)

 Source: TradingView, NAHB, NBER 

A Shift in Focus on Economic Activity…But Market Impact?

Moving past some Japanese trade figures, Chinese and New Zealand rate decisions and UK CPI; the next major theme – rather than event – to register on my radar will be the run of August PMIs. These are timely proxies for GDP. With the debate over the veracity of data from government agencies, private readings like this take on an additional level of interest. That said, the updated growth insight for Australia, Japan, Eurozone, United Kingdom and United States offers a critical overview for how major economies are performing with different struggles at their respective doorsteps.

For example, Japan struggling with trade while the United States sees its domestic consumption start to throttle while increasingly being treated as a pariah in the global community suggests looking to different perspectives and components (amid the composite, manufacturing and services measures). These indicators matter individually to their respective regions, but don’t forget to consider them collectively and what they can reflect on the health of the global community.

 

Chart of Google Search Trends Worldwide for ‘Tariffs’, ‘Interest Rates’ and ‘Economy’ (Daily)  

 

Source: Google Trends 

Will the Fed Be Bullied Into Rate Cuts when Inflation Pressures Hold?

Finally, the week ends with the Federal Reserve hosting Jackson Hole Economic Symposium. This annual event brings central bankers, academics and financial industry leaders together to discuss important themes impacting the global economy and markets. The theme of this gathering will be “labor Markets in Transition: Demographics, Productivity and Macroeconomic Policy’. That is not what the market wants to have critical insight on. There is a greater need for data accuracy, central bank independence and the influence of politics on monetary policy. It is unlikely that the gathering will avoid these topics at this critical juncture; but they will come in a less official capacity.

To find truly insightful and definitive updates that can stand out as exceptionally market relevant, I will be looking to Fed Chairman Jerome Powell’s speech on Fridy at 14:00 GMT – plenty of runway for a market impact through the active US session. The central banker has avoided truly pushing back on the President’s constant berating on his policy decisions and reasoning; but there is little reason to ‘take the high ground’ with Trump actively seeking his replacement and flirting with means to oust Powell through means such as flagging overages on the Federal Reserve’s renovations. The probability that the central banker takes a harder and more provocative stance is low, but the potential impact it has on the market if he does would be very high. So, it is a scenario to monitor and not right off.

 

Chart of Implied Fed Cuts Through H2 2025 and H1 2026 (Daily)

 Source: TradingView, CME 

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--- Written by John Kicklighter, Global Head of Content