Halyard’s Weekly Wrap – 12/2/22

Powell Unwittingly Reprices Future Rate Expectations

This has been the kind of week that nimble traders love and position traders hate. The two main drivers of volatility this week were Chairman Powell’s speech before the Brookings Institute and the November employment report. The result has been a wildly vacillating rates market. The two-year note started the week at 4.44% but plunged to 4.23% on Thursday before retracing some of the move to close the week at the mid-point of that range. The 30-year followed the same path, opening the week at 3.72% before dipping down to 3.60%.

The catalyst for the plunge was Chairman Powell’s speech and Q & A before the Brookings Institute. We were especially attuned to the speech as it was a rare deviation from his post-FOMC press conference in which he answers “softball” questions from junior reporters. That’s not to say that he’d be playing to a hostile audience since former Fed Chairman Ben Bernanke is a member of the Institute and would be loath to offer anything but a welcoming environment. Nevertheless, we expected the level of questioning to deeply delve into the current stance of monetary policy. We were correct on both thoughts. He was introduced as if he were a conquering general returning from a vicious but victorious battle to slay inflation, while the line of questioning was much more forward thinking than the “what’s going to happen at the next FOMC.”  Powell, while not abandoning his avowed mission to defeat inflation, was the most dovish he’s been since this time last year. Without explicitly saying so, he communicated that the next rate hike will not be 75 basis points (likely 50) and acknowledged the obvious signs of a weakening economy.

Then came this morning’s release of the November employment report which was nothing short of a shocker. The consensus forecast was for 200,000 new jobs, which we thought was overoptimistic given the steady rise in weekly unemployment claims and anecdotal job cut announcements. Instead, the BLS announced that 263,000 new jobs were added in the month and the October new jobs count was revised higher by 23,000. That outcome completely overshadowed the weakening economy narrative and could arguably change the mind of Powell and the committee when they make their rate decision in two weeks. Except this committee has emphasized follow-through with regards to their action and after his comments at the Brookings Institute we think that’s unlikely. Although, the December CPI measure is to be released on December 13th, the day before the FOMC rate decision, and could prove problematic if it comes in above expectations. Still, we think the next rate increase will be 50 basis points.