The Market Today

Powell Focused on “Restoring Price Stability”


by Craig Dismuke, Dudley Carter

TODAY’S CALENDAR

Fed Communications Center Stage Again Today: It is another quiet day for the economic calendar with only the Richmond Fed Manufacturing Index scheduled for release at 9:00 a.m. CT.  Like yesterday, Fed communications are likely to be the focus for markets.  New York Bank President Williams (voter) speaks at 9:35 a.m.  San Francisco’s Bank President Daly (non-voter) speaks at 1:00 p.m.  Cleveland Bank President Mester (voter) is scheduled for 4:00 p.m.  St. Louis Bank President Bullard spoke on Bloomberg TV this morning.  Not surprisingly given his role as the outspoken hawk, Bullard advocated for a faster liftoff, including the consideration of 50 bps hikes and a quick commencement of balance sheet runoff.


OTHER ECONOMIC NEWS

Powell Strengthens Pledge to Move Bigger and Faster if Necessary: In a speech titled “Restoring Price Stability,” Fed Chair Powell said the “current picture is plain to see: The labor market is very strong, and inflation is much too high.” He again blamed a large portion of the inflation surprise on the “severity and persistence of supply-side frictions” which collided with “strong demand,” and said officials will no longer be “assuming significant near-term supply-side relief.” In answering three rhetorical questions, Powell acknowledged that “no one expects that bringing about a soft landing,” a term for bringing inflation down without disrupting the labor market, “will be straightforward.” After repeating that price stability is “essential” for a “sustained period of strong labor market conditions,” Powell said that “if we conclude that it is appropriate to move more aggressively by raising the federal funds rate by more than 25 basis points at a meeting or meetings, we will do so,” later noting that “nothing” will keep the Fed from hiking 50 bps in May if the situation warrants. “And if we determine that we need to tighten beyond common measures of neutral and into a more restrictive stance,” Powell added, “we will do that as well.” “We have the necessary tools, and we will use them to restore price stability,” Powell concluded.


TRADING ACTIVITY

Powell’s Pointed Promise to Bring Inflation Down Pushed Rates Sharply Higher: In case markets didn’t grasp the spirit of his message at last week’s post-meeting press conference, Fed Chair Powell reiterated Monday that officials will use their tools, at an appropriate pace to an appropriate degree, to restore price stability. And markets heard him loud and clear. Treasury yields had reached their highest levels since May 2019 overnight in the aftermath of last week’s surprisingly hawkish Fed decision and portions of the curve remained inverted. Fed officials now expect the equivalent of six additional quarter-percentage point hikes by the end of this year, compared with just three total hikes in December’s forecast, and restrictive policy sometime in 2023. Monday’s rise for Treasury yields, however, reached a fever pitch as Powell delivered his speech with a clear do-what-is-required tone (more above). The 2-year Treasury yield surged 17.9 bps to 2.12%, its second biggest single-day increase since June 2009, and an aggressive policy path priced into Fed funds futures became even more hawkish. With six scheduled meetings remaining in 2022, the year-end expected rate just below 2.20% implies at least one 50-bp hike with the possibility of another. The 3-, 5-, and 7-year yields rose by similar amounts to between 2.32% and 2.34%, all closing inverted to, or above, the 10-year yield which tacked on 14.0 bps to 2.29%. The 17-bps spread between the 2-year and 10-year yields was the lowest since March 2020 and the 40 bps of spread between the 2-year and 30-year yields was the tightest since December 2018. Although equities fluctuated between gains and losses throughout the day, final levels and daily changes were a far cry from reflecting a fearful response to the forceful rise in Treasury yields. The Dow slipped 0.6% while the S&P 500 ended essentially flat.

Global Yields Continue to Climb: Global sovereign yields traded higher overnight and Treasury yields continued to press higher as the war between central banks and inflation remains front and center of investor focus. As Asian markets opened Monday evening U.S. time, yields on government bonds in Australia and New Zealand spiked higher. A weekly report on consumer confidence showed optimism in Australia slumped to its lowest level since 2020 as inflation expectations extended a steady climb. The head of the country’s central bank, among the more dovish global banks, said officials are monitoring the shifting inflation expectations. Sovereign yield curves in Europe rose between 3 and 5 bps with larger moves notched by medium-term maturities. Treasury yields posted stronger gains, adding to Monday’s surprisingly strong jump in response to Chair Powell reinforcing the Fed’s resolve to restore price stability and clearly opening the door to 50-bp moves at coming meetings. At 7:20 a.m. CT, the 2-year yield was 5.7 bps higher at 2.17%, a new high since May 2019. Fed funds futures now reflect more than 0.75% of tightening over the next two meetings (May 4, June 15), implying the probability of at least one half-point hike with the possibility of another. The 5-year yield rose 4.3 bps to 2.36%, its highest mark since April 2019. The 10-year yield was up 6.0 bps to 2.35%, a new high back to May 2019. The 3-year, 5-year, and 7-year yields continue to trade above the 10-year yield. Despite yields’ persistent push higher, equities remain relatively calm. Europe’s Stoxx 600 was 0.4% higher with banks leading the way while U.S. equity index futures recovered between 0.1% and 0.4%.


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