Chairman Powel left the first in-person FOMC press conference in two years as a G.O.A.T. (greatest of all time), according to the investment media and suffered the fate of a spring lamb the very next day. For those unfamiliar with the term “spring lamb,” myself included, it’s a lamb slaughtered before it reaches its first birthday. Apologies for the grim analogy. On Wednesday investors were delighted that Powell had driven home the point that a 75 basis point rate hike was not forthcoming and cheered by his general tone of confidence. However, by the next morning the relief had been replaced by anxiety that stagflation is on its way, stock prices are too high and the yield curve too flat. From the Wednesday’s high to the Friday low, the S&P 500 tumbled more than 5.5%. Equally vicious was the selloff in the 30-year. On Thursday, the long bond fell nearly 3 ½ points before retracing about half of that by the close. To put that price action into perspective, the current long bond (2 ¼% 2/2052) is trading at a price less than 82, down from its issue price of 100 in February. The yield-to-maturity calculates to 3.20%, offering a real return of about -5.00%. Moreover, with the latest selloff, the 2-year/30-year yield curve has steepened 51 basis points since April 1st. Typically, the yield curve steepens when market participants believe the Fed is losing the inflation battle.

Last week we flagged the advance report of Q1 GDP as the economic report to watch this week, and we were spot on. Investors were shocked to learn that economic activity contracted 1.5% in the first quarter, driven primarily by trade and government spending. On the bright side, the consumer continued to spend, with the personal consumption measure rising 4.7% over Q1 2021. But a big expansion in imports and reduced government handouts were more than enough to offset the gain in consumption.

The minutes of the recently concluded FOMC meeting are rarely of interest since the Fed adopted the post-meeting press conference during Chairman Bernanke’s term. Since then, Fed Chair’s have chosen to communicate the committee’s thinking at the post-meeting press conference. Chairman Powell didn’t follow that pattern at the March 15 meeting as the minutes contained “bombshell” information. Two days ago Fed Governor Brainard rocked the markets with her comments that the Fed was ready to begin to reduce its balance sheet. That was confirmed yesterday when the minutes loosely detailed how balance sheet reduction was to be implemented.

The brutal bear market in bonds continued this week, with the two-year note 108 basis points higher than where it stood on March 1st. Following a solid non-farm payroll report, two’s are 9 basis points higher for the first day of April. As a result, the 2-year/30-year yield curve is now marginally inverted, which is likely to provoke recession fears. Historically an inverted yield curve signals a recession ahead. We think the selling is getting overdone, but are reluctant to extend duration until we see some stability in the market.

All eyes were on the FOMC outcome this week. As expected, Powell and the FOMC raised short term interest rates 25bps to a range of 25ps to 50bps. Market participants interpreted the accompanying statement and Powell’s post meeting comments as decidedly hawkish. This flattened the US Treasury curve further, with an inversion seen in 3 year US Treasury Notes and 5 year Notes exceeding the yield to maturity of the 10 Year Note. A signal usually portending slower growth in the future as interest rate increases slow sectors of the economy most dependent upon leverage.