Morning Report: Jerome Powell spooks the markets

Vital Statistics:

S&P futures4,027-32.27
Oil (WTI)94.421.38
10 year government bond yield 3.09%
30 year fixed rate mortgage 5.70%

Stocks are lower this morning on follow-through Jerome Powell’s Jackson Hole speech last Friday. Bonds and MBS are down.

Jerome Powell’s Jackson Hole speech was a seismic event in the stock market, although the reaction didn’t really get going until long after. Here were his prepared remarks. It looks like this section was what got everyone’s attention:

Restoring price stability will take some time and requires using our tools forcefully to bring demand and supply into better balance. Reducing inflation is likely to require a sustained period of below-trend growth. Moreover, there will very likely be some softening of labor market conditions. While higher interest rates, slower growth, and softer labor market conditions will bring down inflation, they will also bring some pain to households and businesses. These are the unfortunate costs of reducing inflation. But a failure to restore price stability would mean far greater pain.

The stock market and the bond market sold off and the Fed Funds futures got more hawkish. They are now predicting a 2/3 chance of a 75 basis point hike in September and a 1/3 chance of a 50 basis point hike. The December futures are handicapping a 50% chance that the target rate will be 3.75% – 4.00%. A month ago, that wasn’t even in the mix. So basically over the past month, we have added about 50 basis points to the end-of-the year Fed funds futures forecast.

The reaction in the bond market was to send the 2 year and the 10 year yield higher, and a stronger inversion to the yield curve. The 2s 10s spread is 33 basis points and 2s 30s is 18 basis points. So this is a pretty substantial recessionary indication.

I would summarize the market’s interpretation of Powell’s comments as this: “We are going to raise rates higher than the market is anticipating, and will keep them there longer than the market is anticipating. We are going to cause a recession and if we have a hard landing, so be it.”

Is this an overreaction? Quite possibly. I would ask however if inflation has gotten worse or better since the June meeting. Because in June, the Fed saw a Fed Funds rate of 3.25% – 3.5%.

The month-over-month changes for the CPI were 1.0% in May, 1.3% in June and 0% in July. PCE inflation has been trending down as well. We will get 2 more jobs reports and 1 more CPI report before the Fed meets in September. If inflation is indeed moderating, I don’t see the Fed upping their own Fed Funds forecast, especially since they see the long-term rate (last column) around 2.5%.

The week ahead will contain a lot of important data, with the jobs report on Friday being the most critical. We will also get some house price data with FHFA on Tuesday. On Thursday we get ISM, productivity and costs and construction spending.

11 Responses

  1. Good piece:

    “A fight among historians shows why truth-seeking and activism don’t mix
    Image without a caption

    By Megan McArdle
    August 29, 2022 at 7:00 a.m. EDT”

    This spot on:

    “If you think of your own work as a political project, then so will everyone else. And there’s a reason that no one trusts politicians.”


  2. Will Biden lose another one?

    And if we abandoned the embassy, is the Afghanistan withdrawl a best case or worst case model?


  3. At least Maher still has some honesty left:

    ““Is it okay to have a conspiracy to get rid of Trump?” Maher asked guests Reiner and Sen. Amy Klobuchar (D-MN).

    While the Biden laptop story was largely met with skepticism by Trump critics when it first broke, numerous outlets have since confirmed the authenticity of materials from the laptop, including the New York Times.

    “Now look, let’s not pussyfoot around this; he was selling the influence of his father, Joe Biden. I mean, most political sons do, but let’s not pretend at least that was going on… so Hunter Biden’s laptop was buried by the press. Even the head of Twitter Jack Dorsey said that was a mistake,” Maher said.

    The comedian asked if such actions are justified if it’s to get rid of someone “as bad as Trump.”

    “It’s a little bit of a thorny question because once you go down this road- this is sort of where we are in this country, the other side is so evil, anything is justified in preventing them from taking office. Is it?” he said.”


  4. Great reminder…when Obama nationalized the student loan industry, it was argued that doing so would help pay for Obamacare. Because, you know, all those profits that banks earned on student loans would now end up in government coffers.

    So much for that plan.


  5. I’ve heard the Tom Cruise is gay rumors, the gerbil up Richard Gere’s ass and the pint/quart/gallon of jizz in Rod Stewart’s stomach but I admit to having never heard the Dave Chappelle The Talk rumor.


  6. Weird.

    Good thing they fired all the unvaxxed drivers.


  7. Ace linked to this story yesterday.

    Someone is going to have to explain to me why we are supposed to feel sorry for this woman.


  8. Lol


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