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Federal Reserve Chair Jerome Powell is gearing up for an economic discussion on Friday amid notable shifts in economic indicators. With a continued decline in inflation and a sharp drop in treasury yields, investors eagerly await Powell’s remarks to gauge potential policy adjustments or a shift in tone towards a more hawkish stance.
Positive data supporting the dovish outlook emerged on Thursday, with headline inflation remaining flat month over month and registering a 3% increase year-over-year. Core PCE, the Fed’s preferred inflation gauge, aligned with economists’ expectations, excluding volatile food and energy prices.
While first-time unemployment claims slightly exceeded expectations, continuing claims reached their highest level since November 27, 2021, signaling a cooling-off in both prices and the labor market, favoring interest rate doves.
Treasury Yields Under Pressure
Treasury yields have faced significant pressure, with the 10-year Treasury yield falling to 4.27%, the lowest since mid-September. Despite a minor rebound to 4.33%, the Cboe 10 Year Treasury Note Yield Index is now trading nearly 7% below its 50-day moving average, a crucial technical level.
Conversely, the S&P 500 and Nasdaq composite have experienced rallies, with the SPDR S&P 500 ETF Trust (SPY) showing over a 19% increase year-to-date.
Differing Views on Rate Hikes
S&P Global Ratings diverges from current consensus, suggesting that the Fed may not be done hiking rates. Factors influencing this view include a shift in Treasury debt issuance towards shorter durations and market enthusiasm possibly overestimating the elimination of further rate hikes. S&P Global anticipates another 25 basis-point rate hike, likely in December, before rate cuts commence in mid-2024.
On the contrary, analysts like B. Riley Financial Chief Market Analyst Art Hogan argue against a December rate hike, citing lower inflation, softer economic data, and a shift in Fed speakers’ consensus towards a more cautious stance. The Fed funds consensus for December implies less than a 5% chance of another rate hike, suggesting that the current hiking cycle may be complete.
Powell’s Expected Stance
As Powell prepares for his appearance at Spelman College in Atlanta, analysts anticipate him to maintain a consistent, if not more conservative, stance. While some expect Powell to walk back recent dovish commentary, others believe he will reiterate the Fed’s data-dependent approach, emphasizing that rate cuts are not under consideration at the moment.
CFRA Chief Investment Strategist Stovall predicts a consistently hawkish tone from Powell, emphasizing the Fed’s commitment to data dependency and resisting premature rate cuts influenced by market sentiments. Stovall anticipates rate cuts in 2024, likely in Q3, once inflation concerns are thoroughly addressed.
