Powell Signals No Retreat, No Surrender

  • One of the overarching market themes this year - aside from the hype around artificial intelligence - has been investors avidly building up bets on the Federal Reserve finally announcing an end to its cycle of rate hikes, only to have that optimism dashed.
  • There's no doubt, the U.S. central bank is nearing the end of its mission to wrestle down inflation. Headline consumer price pressures are rapidly abating, thanks to a wholesale retreat in food and energy prices. Headline inflation in July rose 3.2% annually - a far cry from last June's 9.1% - and nearing the Fed's 2% target.
  • Inflation as reflected in the Fed's preferred data point - the core personal consumption in expenditures (PCE) index - is running at 4.1%, having peaked in February 2022 at 5.4%.
  • The economy isn't generating jobs as quickly as it was a year ago, but it's still set to add another 170,000 in August, which will mean more than 25 million workers will have been added to non-farm payrolls since the depths of the COVID pandemic in April 2020.
  • Crucially, Fed Chair Jerome Powell has once again reinforced the "higher for longer" mantra that has underpinned most of his, and his officials', communications this year, no matter how much market participants have bet otherwise.
  • U.S. two-year Treasury yields, the most sensitive to shifts in expectations for Fed monetary policy, posted their largest weekly rise in two months last week, after Powell's comments at the annual Jackson Hole Economic Policy Symposium. He vowed to tread carefully with rate rises and rely on incoming data but was clear about the endgame.
  • “It is the Fed's job to bring inflation down to our 2% goal, and we will do so," he said. Money markets show traders believe the Fed has one more hike in the pipeline this year, which would bring its target rate to a range of 5.50%-5.75%, from 5.25%-5.50% right now. Just three months ago, when rates were at 5.125%-5.37%, markets were betting on a year-end range of 5.00%-5.25%, implying at least one rate cut this year.
  • This week, investors get a dose of top-tier data to help shape their view on the Fed's next move. A second read of U.S. gross domestic product is due on Wednesday, while core PCE and August non-farm payrolls arrive on Thursday and Friday, respectively.

(Source: Reuters)