Powell Pushback

Rate Volatility is in Charge

Wall Street snapped a hot streak as bond yields jumped sharply on a bit of a pushback from Fed chair Jay Powell – no doubt alarmed by the swift repricing in the market in the last week. The S&P 500 fell 0.8%, ending an eight-day winning streak, whilst the Nasdaq lost almost 1% for the session. For the week they are broadly flat. Asia followed lower and European stocks were a bit weaker at the open on Friday but still just about eking out a weekly gain. Oil is heading for a third weekly decline and is now firmly below the Oct 7th gap.

Powell Pushback

Powell; “The Federal Open Market Committee is committed to achieving a stance of monetary policy that is sufficiently restrictive to bring inflation down to 2 percent over time; we are not confident that we have achieved such a stance,” he said Thursday… “If it becomes appropriate to tighten policy further, we will not hesitate to do so." He also warned about “head fakes” with regards good inflation data – a nod to the fact that the FOMC is very worried that premature declaration of victory is the biggest threat right now, and that a combination of easier financial conditions and higher oil could spike their triumph. As the IMF puts it: "Most unresolved episodes [in sustainably reducing inflation] involved 'premature celebrations' where inflation declined initially only to plateau at an elevated level or re-accelerate."

The FOMC is not Confident it’s Done Enough

This is not new news, but the market had moved quite quickly to price out further hikes in the wake of the pauses by central banks last week – as I said, a little too quickly. This was a subtle pushback – not the harshest of words for the market, but enough to remind bulls that it’s not definitely finished yet and nudge them to trim profits. Yields firmed – the US 10yr up to 4.65% from 4.5% - having briefly plunged to 4.4%, before pulling back a bit overnight to sit around 4.6% this morning. The US 2yr is back above 5%.

Too Early for Cuts?

From a raft of central bank speakers this week we have a got a clear enough message – we are not sure we are done, it’s too early to discuss cuts – the sort of talk we expected given the volatility we have seen in rates of late. They are trying to steady the ship and anchor expectations – but as soon as they signal a pause the market sees a pivot and front runs the first cut…it’ll continue like this for a while yet.

Stagflation in the UK

Huw Pill, the Bank of England chief economist who said earlier this week the market was about right to price in cuts in the middle of 2024, changed tack: It’s “crucial”, he said, that the “restrictive response also has to be persistent, in order to squeeze the inflationary situation out of the system”. For now the problem for the UK is two-fold stagnation and inflation – zero growth recorded in the third quarter reported today by the ONS.   

Sterling trying to regain some footing at the 21-day EMA after a sharp decline this week breached the 50-day SMA after being repulsed decisively at the 200-day.

WTI – looking a bit oversold, holding for now at the 38.2 Fib line