As much as the Fed is planning to taper, watered down expectations going into Jackson Hole says more about the economic outlook
If the Fed isn't going to announce a taper soon, the fear is that they might not get the chance to do so if the US virus situation worsens further in the weeks/months ahead.
Delta variant concerns have been the key theme in the market this week and we've already started to see its impact on US consumption, adding to the softer consumer sentiment report from Friday last week.
As much as the market fears a taper tantrum from when the Fed will announce the start of tapering, either formally or informally, this kind of tantrum based off the fact that the Fed needs to get the timing right (or else miss the boat) is also capable of hurt.
While US equities aren't overbearingly burdened by it (easy money still rolling in), the FX market has certainly realised some major fears this week as commodity currencies fall apart and we are seeing some key moves from a technical perspective.
The bond market also isn't convinced of a hawkish Fed as 10-year Treasury yields are pushing away from the highs earlier in the week of 1.30% to 1.23% today, with room to roam towards the downside still.
If one is to look at it this way, this could be the market already setting itself up for the aftermath of the Jackson Hole symposium next week.
Given that Powell has already been rather timid to begin with, the fact that we are seeing a surge in delta variant risks pretty much reduces the likelihood of a hawkish tilt or any major taper announcement.
Not only that, it would be even more disconcerting for the market if Powell & co. starts to acknowledge the risks posed the delta variant on the economic outlook - maybe even pushing back the taper timeline to next year.
While that may seem favourable for stocks since easy money will stay for longer, it's not a good look when it means more dire consequences for the economy i.e. a weaker global recovery until the virus situation is brought under control.
Here is UBS' take on the matter as we look towards the end of the week:
"The FOMC minutes also revealed concern over the spread of the delta variant, and the seven-day moving average of new COVID-19 cases has more than doubled since then. Under these circumstances, we believe that the Fed will be reluctant to use next week's Jackson Hole symposium as an opportunity to take another step toward tapering. In fact, in our view, no matter how long they have to wait, the Fed is unlikely to announce the taper until case counts at least fall back to where they were at the time of the meeting."
The chart below shows that the 7-day average daily COVID-19 case count in the US has pretty much doubled from ~70,000 to ~140,000 since the last FOMC meeting in July.
While the Fed not leaning towards tapering may seem like a good thing for risk trades (staying away from a taper tantrum), the reasoning for that says a lot more about the dim economic outlook - and perhaps it already is considering what we're seeing this week.
