The Market Today
Powell Channels Volcker, 5-Year Hits 3.00%
by Craig Dismuke, Dudley Carter
S&P Global PMIs: The only reports on today’s calendar are the preliminary April S&P Global PMIs. The Manufacturing index is expected to decrease from 58.8 to 58.0 while the services index is expected to hold flat at 58.0. ECB President Lagarde is scheduled for 8:00 a.m. and BOE Governor Bailey at 9:30 a.m.
OTHER ECONOMIC NEWS
Fed Chair Powell Primes the Pump for 50-Basis Point Hike in May: Fed Chair Powell reinforced market expectations for a half-point hike when officials gather in early May. “Fifty basis points will be on the table for the May meeting,” Powell said during an IMF panel discussion on Thursday. “It is appropriate in my view to be moving a little more quickly,” Powell said, adding that “there’s something in the idea of front-end-loading.” He said the Fed would do their “very best” to accomplish a successful soft landing for the economy, but acknowledged that “It’s going to be very challenging.” He described the labor market as “too hot” and stated that “It’s absolutely essential to restore price stability.” “Economies don’t work without price stability,” he noted, before praising former Fed Chair Volcker for his resolve in dealing with the undue inflation pressures of the 1980s. “Chair Volcker understood that expectations for inflation play a significant role in its persistence,” Powell noted, going on to say that “He therefore had to fight on two fronts: slaying, as he called it, the ‘inflationary dragon’ and dismantling the public’s belief that elevated inflation was an unfortunate, but immutable, fact of life.” Chair Volcker “knew that in order to tame inflation and heal the economy, he had to stay the course,” Powell said.
Stocks Slump Amid Latest Global Yield Surge: Markets were exceptionally volatile Thursday as the latest upward surge for global interest rates ruined an overnight rally for U.S. equity futures. The S&P 500 opened up 1.2% but quickly and steadily reversed those early gains, tracking a straight line lower to close down 1.5% and at session lows. The energy sector led broad declines across all eleven S&P 500 sectors. The Dow fell 1.1% while the Nasdaq slumped 2.1%, a symptom of the severe sell-off in global bonds that pushed yields up to new multi-year highs. The upward move was most severe for European yields in response to hawkish remarks from ECB officials. ECB President Lagarde, speaking alongside Fed Chair Powell at an IMF event, sounded sanguinely patient, noting “once we say that we are data-dependent, for goodness sake, let’s wait until we have the data and then we move on to decide.” However, three other ECB officials were notably more hawkish, speculating the bank could raise rates at the July meeting and at additional meetings this year. With money markets moving to price in three quarter-point hikes from the ECB this year, Germany’s 2-year yield jumped 14.7 bps to 0.19%, its largest daily increase since 2011 and highest level since 2014. Treasury yields followed suit as Fed Chair Powell all but cemented expectations for a 50-bp hike in May (more above). Fed funds futures more than fully priced in a half-point hike in a couple of weeks. The 2-year Treasury yield jumped 10.7 bps to 2.68%, its highest close since December 2018. After breaching 3.00% for the first time since November 2018, the 5-year yield finished up 11.3 bps at 2.97%. The 10-year yield added 7.7 bps to 2.91%, its second highest finish since December 2018.
Global Yield Curves Flatten Further As Investors Brace for Central Bank Tightening: Global yield curves have continued to flatten Friday as investors continue to adjust to central bankers adamantly pledging to tame historic inflation with aggressive rate actions, despite acknowledging the risk it poses to economic growth. Treasury yields trailed larger moves in Europe Thursday but were setting the pace on Friday. The 2-year Treasury yield rose 8.8 bps to 2.76% at 7:20 a.m. CT, a new high back to 2018. The 5-year yield was up more than 2 bps and fluctuating around 3.00%, rising as high as 3.05% in Asian trading. Fed funds futures are now fully pricing in multiple 50-bps hikes and a year-end rate around 2.83%, implying 2.50% of additional tightening this year. The 10-year yield was 1.0 bps lower at 2.90% after initially climbing to a new cycle-high of 2.97%. The spread between the 2-year and 10-year yields flattened another 6.5 bps to below 16 bps, the lowest since April 6. European yields moved in a similar manner while U.K. yields tumbled across the curve. Data released Friday showed retail sales in the U.K. declined by 1.1% in March, a second monthly drop that reignited worries about economic activity across the Atlantic. The head of the Bank of England said Thursday, “We are walking a very tight line between tackling inflation and the output effects of the real income shock, and the risk that could create a recession.” The Bank of England has raised its target rate three times over recent months. Europe’s Stoxx 600 fell by more than 1%, despite better-than-expected preliminary PMI results for April, while U.S. equity futures were mixed before 7:30 a.m. CT. The Nasdaq recovered 0.3% with the S&P 500 little changed and the Dow down 0.2%.