Another month, another hotter than expected inflation report. This time it was one which the Fed focus on: “Core PCE”. Expectations were for 4.3% YoY – it came at white-hot 4.7%. Where is the problem? Simple… services. And until we see unemployment tick higher… core services inflation will remain sticky. The Fed has a long fight on its hands… and the market is only recently connecting those dots
Bonds Realign with the Fed… Not Equities
From the first week of 2023 – bond markets were at odds with the Fed. For example, yields on the 2-year treasury plunged from 4.50% to barely above 4.0% over the past 6 weeks. And yet – the Fed were resolute in their resolve to keep raising rates. Something was amiss. Turns out that bond markets have pivoted and now see ‘eye-to-eye’ with the Fed that rates are staying higher for longer. Go figure. However, equities are yet to get the memo…. that’s risky.
Bonds React to “Higher for Longer“
Bond markets (and the US dollar) appear to be reacting to the likelihood the Fed has ‘more work to do’ on bringing inflation down to its 2.0% target. For e.g., the US 2-year treasury has surged almost 50 bps the past couple of weeks on stronger than expected economic data (eg surging jobs and higher wages). Meanwhile, JP Morgan’s CEO – Jamie Dimon – said it’s too early to declare victory on inflation. What does this mean for stocks?
Powell Leans Dovish – Sending Stocks Higher
The market was worried about an overly hawkish Fed heading into the Feb FOMC meeting. However, Fed Chair Powell appeared to lean the other way… hinting at dovish tones. New language like ‘disinflation’ were introduced… suggesting the cash rate may not need to get to 5.0%. It didn’t take much for stocks to rally as a result…
For a full list of posts from 2017…