Jackson Hole Preview Commentary – Enter Stage Left

As we head closer to Jackson Hole, every speaking opportunity for the Fed is a chance to disrupt the interest rate market, no matter the topic. We have noticed over the last couple months under this new Fed regime, the trend is toward unpredictability and has been compounded by recent surprises from Treasury Secretary, Scott Bessent. The bond market has reacted in the opposite way the Fed and the Treasury had hoped, as the bond vigilantes have responded by adding more term premia to Treasury yields to compensate investors for this lack of predictability and clarity.

The upcoming Jackson Hole Symposium from August 27^th to 29^th is the Fed’s next shot to bring comfort to the markets. This yearly event gathers prominent central bank leaders, finance ministers, academics, and financial market executives from around the world. The keynote address delivered on Friday morning by Fed Chair Warsh will be the highlight and will be heavily watched for signals regarding future monetary policy and interest rate paths.

We expect Fed Chair Warsh to be brief and measured at this year’s keynote speech. The anticipated lack of forward guidance has prevented the market from fully pricing out a hike at the Fed’s next FOMC meeting on September 16^th despite some encouraging inflation data reported over the last month. We do not expect a signal from Jackson Hole because the FOMC has been publicly divided and most notably, we have another round of CPI and PPI before the September meeting. In this Jackson Hole speech, we feel he will likely speak to big-picture issues and potentially report on some preliminary findings from his “task forces”.

While it is Fed Chair Warsh’s first Jackson Hole as Fed Chair, Treasury Secretary Bessent has now entered stage left and into the spotlight with a surprise move last week that did nothing but spook markets further. The Treasury’s decision to “at least double” planned purchases of outstanding long term debt was seen as a departure from its long-held strategy of making “regular and predictable” announcements. Clearly, the administration is feeling the pressure of rising rates and is trying to intervene on their own through a form of quantitative easing. While still early, they have not succeeded.

Investors, including billionaire Stanley Druckenmiller, think Bessent’s move isn’t a good idea. Druckenmiller explains during a Wall Street Journal interview “the bond market wasn’t being a vigilante, as some would argue. It is being a pushover that had finally begun to clear its throat and Treasury moved to quiet even that.”

We also noted an interesting development that we believe has increased the volatility and fragility of the Treasury curve. As seen by the graph below, Treasury ownership has shifted toward more valuation-sensitive buyers and could include more “fast money” activity.

As part of Wealhouse’s ongoing underwriting process, the collaboration between the equities and credit teams has uncovered interesting underlying trends in inflation. Notably, we are hearing anecdotes of “no hiring, no firing” in the labour market. During a meeting with Japan’s largest IT services provider, Fujitsu, our equities analysts, Devon Morrison and Georgia Serbinis heard that management expects headcount to be flat to down over time, with hiring lower this year than last. They are broadly detaching from decade-long H.R. practices at the company to accommodate talent scarcity. Additionally, we have noted from energy and real estate executives that insurance costs in real estate have fallen by high single digits year over year.

One trend that is increasingly worrisome is the current high reached in “crack spreads” as seen by the chart below. A crack spread is defined as the price difference between crude oil and its other refined products, namely diesel fuel. This spread is crucial input cost for everyday products, showing pricing pressures remain sticky and can directly flow through to consumers and keep inflation high. This trend is reinforced by our analyst, Bridget Morrison’s meeting with the CEO of factory home builder, Cavco Industries. Management referenced seeing input material and transportation cost increases well above the Fed’s 2% inflation target.

While we continue to believe hikes will be pushed further into 2026 and 2027, the developments above show that a new dynamic, namely the Treasury Secretary influence, has created further uncertainty. It is clear we are entering into a Fed regime that although uncharted, has many similarities to the past regimes of Greenspan and Bernanke. We continue to welcome any volatility that will potentially continue while remaining rooted in fundamentals and respecting technicals across all three of the Wealhouse strategies.