Bond Watch: what to expect from the crucial Jackson Hole meeting

Sam Benstead runs through the most important news stories of the week for bond investors.

Welcome to interactive investor’s new weekly ‘Bond Watch’ series, covering the latest market and economic news – as well as analysis – that is relevant to bond investors.

Our goal is to make the notoriously complicated world of bond investing simpler, by analysing the week’s most important news and distilling it into a short, useful and accessible article for DIY investors.

Here’s what you need to know this week.

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All eyes on Wyoming

Today and over the weekend the world’s most important central bankers meet in Jackson Hole, in the rural US state of Wyoming, to discuss the economy and interest rates.

The first in-person Jackson Hole meeting since 2019 will be a critical moment in determining what central banks do next to interest rates.

Their long list of topics for debate include: why inflation is so high and whether increasing interest rates can actually bring it down, how central banks can control inflation without causing deep recessions, and whether inflation is already about to slow down naturally.

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In addition to the behind-the-scenes meetings which will influence the decision-making of central bankers, US Federal Reserve chair Jerome Powell will make a speech this afternoon that will hold many clues about where interest rates will go in America. This speech will have big implications for stock and bond markets around the world.

Silvia Dall’Angelo, senior economist at Federated Hermes, says Powell is likely to push back on expectations of a dovish (bearish) pivot, reiterating the focus on the fight against high inflation. Bonds have been selling off this week in the lead up to the meeting, causing yields to rise.

Dall’Angelo said: “While the latest data on US inflation has been encouraging, suggesting headline inflation might have peaked in June, the Federal Reserve is not out of the woods: inflation is still very elevated, there are still price pressures in the pipeline and the outlook for commodity prices is uncertain amid persistent geopolitical tensions.”

Powell’s comments will influence what markets expect him to do at the next interest rate decision in mid-September.

If markets interpret his comments as hawkish, a 75 basis points rise becomes more likely. This would cause stocks and bonds to sell off.

However, if Powell signals that he is confident the US economy has already seen peak inflation, then 50 basis points may become the base case, which would be good news for stocks and bonds.

Inflation outlook worsens in Britain

Bank of England governor Andrew Bailey will be under more pressure than his peers to act on inflation when central bankers meet at Jackson Hole.

His forecast of peak inflation of 13% early next year already looks out of date, with economists at Citigroup forecasting 18% inflation due to higher energy prices.  

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The Bank rate is 1.75%, but financial “swap” markets, where investors can bet on future interest rates, now point to a doubling of interest rates in Britain to 4% at the peak next year, according to data from the Bank of England.

The yield on the 10-year UK gilt has risen from 2.4% to 2.6% this week, reflecting the prospect of higher interest rates.

This is already having an impact on the mortgage market, where the average two-year fixed deal is now 4.09%, while the five-year is now at 4.19%, according to MoneyFacts, a financial data firm.

While households are already suffering, this summer could very well be the calm before the storm ahead of energy bills doubling and mortgage and other borrowing costs also rising.

In this environment, the fixed payments of bonds is valuable for investors. However, bonds could fall further in price if the Bank of England has to increase rates more than markets currently expect in order to control inflation.