Often, it is the unspoken that deserves the most attention.
Federal Reserve Chairman Jerome Powell decided to ignore the issue inflationary and raised interest rates during a central bank conference in Stockholm this week, as the market bet against his previous Eagle signals, which could prove as important as his late-August speech in Jackson Hole as he quelled a summer rally with bleak forecasts and vows to keep tightening. .
Even though minutes from Fed meetings warning that interest rates will rise beyond 5% and stay there for a whileHints of near-term rate hikes from Fed Governors in media interviews and Powell’s recent warnings about risks of unregulated consumer prices, stock and bond markets The vote continues to challenge the central bank’s overall anti-inflation message.
The S&P 500 has gained about 3.36% since the end of December, a modest increase from last year’s devastating 20% drop, but nonetheless significant in the face of the Fed’s hawkish warnings.
The FedWatch by CME . Groupmeanwhile, is pricing with a 79.2% probability of 25 base point rate hike from the central bank on February 1, with bets on the possibility of a rate cut appearing at the Fed’s September meeting.
The benchmark 2-year yield, which closed at 4.403% at the end of December, has fallen to around 4.21% amid reduce wage pressure in the job marketa grim assessment of service sector performance from the ISM survey and bets on controlled December inflation data from the Commerce Department later this week.
It’s a long way from the Fed’s prediction of a Fed funds rate that is north of 5%, which it will hit in early spring, and echoes rate hike bets from the FedWatch that not only see rates peaking below 5%, but also forecast a rate cut in the near future. Last half year.
So who do we believe?
Jeffrey Gundlach, the renowned bond investor who runs DoubleLine Capital, has little doubt: “My more than 40 years of experience in the financial industry strongly recommend that investors look at the market instead. because of what the Fed said,” he said in a webcast late Tuesday.
In fact, that view can be tested today as the Treasury Department prepares to auction $32 billion worth of 10-year bonds as part of its ongoing funding.
The auction, reopening a previous issue, will provide a real-time benchmark for fixed income needs before December tomorrow CPI reading, is expected to show bearish pressure for the sixth straight month.
If bidders win the new report, it could indicate they are less concerned about inflation pressures and more worried about the growth outlook, especially now as investors look at trends. Short-term. Depression like a 50/50 bet.
In fact, the bond market been signaling a recession for quite some timeas the yield on 3-month Treasuries is up about 1.14% compared to 10-year bonds, the steepest ‘inversion’ of the yield curve since the early 1980s.
Job growth is forecast to slow significantly in the coming months, after adding 4.5 million new workers last year, continued growth in the housing market and a closely watched survey. sentiment among small business owners fell to their lowest level since 2013 last month.
However, others note that the bond market has ‘screamed’ about recessions in the past and correctly argues that economic models don’t always capture the growing complexity. of a globalized world.
“Consumers are still spending, and with businesses still hiring at a high rate, there’s a chance we can weather the recession, not outright recession,” said Lawrence Gillum, strategist. fixed income of LPL Financial in Charlotte, North. Carolina.
“It’s important to point out that the last time the 3-month/10-year yield curve inverted, the economy was in a recession because of the global pandemic—something we don’t think is priced in when inverted. backwards but it still gets ‘credit’ for the signal,” he added.
Powell, who has focused on central bank independence and the need for a defining mandate from lawmakers in a speech Tuesday in Sweden, has eerily remained silent. in this recent debate.
And if he continues to allow the market to price in smaller rate hikes, lower tops, and cuts in the second half of the year, then he’ll be comfortable with that forecast and willing to let it run. let the inflation data do the repulsion for him.
That can be a big risk.
Ian Shepherdson of Pantheon Macroeconomics, who predicts core CPI will slow to around 2% by the middle of this year, said Chairman Powell has made it very clear that the Fed is not going to anticipate the upcoming drop in inflation. they can ignore it once it becomes clear to the market that the reduction is real.”
