UMBS 5.5 at + 3bps on the open. 10y is down 3 bps.
The recent pattern in overnight trading has seen a flatter trajectory in Asia followed by a setting of the tone in Europe. Said tone can vary, but today’s was largely rate friendly as EU yields bounced back in line with yesterday morning’s lows. This coaxed Treasury yields in a similar direction, but with less urgency. Investors are wary of making big bets before Powell speaks.
Many investors remain sidelined after being burnt repeatedly betting on an inflation peak, cooling US economy and Fed policy pivot. While the S&P 500 index is up 2% this month, recouping some of February’s losses, traders appear reluctant to push the gauge much higher, until they get more clarity on how high interest rates might go and whether the world’s largest economy will dodge recession.
Then by 8:30 am MST
MBS now down 39 bps on the day.
Bonds Losing Ground Quickly on Powell Speech
So far, we only have the prepared text, but the results are not good so far. Here are the bullet points from the speech Powell said:
IF TOTALITY OF INCOMING DATA INDICATES FASTER TIGHTENING IS WARRANTED, WE ARE PREPARED TO INCREASE PACE OF RATE HIKES
ULTIMATE LEVEL OF INTEREST RATES LIKELY TO BE HIGHER THAN PREVIOUSLY ANTICIPATED
LATEST ECONOMIC DATA STRONGER THAN EXPECTED, PARTICULARLY INFLATIONARY PRESSURES
LITTLE SIGN OF DISINFLATION SO FAR IN CORE SERVICES EXCLUDING HOUSING
LONG WAY TO GO ON GETTING INFLATION BACK DOWN, ROAD LIKELY TO BE BUMPY
WE STILL STAY THE COURSE UNTIL JOB IS DONE
for like the 6th time. Wake up and realize this isn’t close to done, and isn’t going to go well for the stock market/GDP numbers!!!
As Chris Maloney pointed out: Powel referenced the 2% inflation target seven times in a speech that takes up just four pages. For all those out there hoping for an increase to the target, I don’t think that is a near term possibility and I pray Powell sticks to 2% over the long run as well. The difference between 2% and 3% for many Americans will mean the difference between a ham and cheese sandwich or a tin of cat food for lunch.
Monetary policy works most quickly via the most interest rate sensitive sectors of the economy, autos and housing. However, for very different reasons, both sectors have successfully resisted the impact of higher rates. Car sales are rising as semiconductor supply improves, and while housing starts are way down, the number of units, both single-family and multifamily, under construction is staggeringly high, and thus construction employment has yet to decline. ~ via econ70.com
JOLTS job survey showed 11m job openings – 57% higher than pre-pandemic. Though, way more remote work options now. Which could mean duplication of listings (same ad, multiple markets). Though Linkedin, ZipRecruiter, and Indeed are showing job openings up 25-30% vs 2019. Keep in mind that JOLTS has a sample size of 21k vs 200m on Linkedin.
Even though Fed Chair Powell didn’t say anything remarkably new or different, markets read enough into his delivery to change the course of Fed Funds Rate expectations in a meaningful way. December’s forecast (per Fed Funds Futures) was closer to 5.3% this morning, but rose to 5.5% by 2pm. There was even a reaction for the meeting in 2 weeks. Markets don’t see a 50bp hike yet, but the reaction suggests that could change if NFP and CPI data come in hot between now and then.