“You’ve got to ask yourself one question: ‘Do I feel lucky?’ Well, do ya, punk?” – Dirty Harry. In Callahan’s case, there might have been just one… maybe two… left in the chamber. Were you willing to take that chance? Sure, Powell delivered what the market expected. However, he reminded us there’s still more ‘lead in the Magnum 44’. The other day I shared how the market has already priced in a 60% probability for a hike in July. That probability remains unchanged after Powell gave his address. However, beyond July, the market is not expecting any. Remember – only a few weeks ago – the market felt that rate cuts were still possible this year. So… do you feel lucky?
Fed Reserve
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Skip, Pause, Hike or Pivot
It’s Fed week. What will the world’s most watched central bank do? A surprise hike like Canada and Australia? Unlikely. Maybe time to hit the pause button and take a look around? That’s what markets are pricing in. Or will this be a ‘hawkish skip’ implying their work is not yet done? From mine, if we see Core CPI anything above 5.0% this week – the Fed will tell us their work is not done. Here’s the thing: markets are trading back at levels before the Fed commenced their 500 bps of rate hikes. What’s more, we find Core PCE still above 5.0%; unemployment well below 4.0%; and wage inflation above 4.0%? What is to stop the Fed from finishing the job? Whilst they are likely to pause – there are more hikes ahead
Bond Market Agrees with the Fed
Two months ago – the bond market was at odds with the Fed. Fixed income markets felt the Fed were going to be forced to cut rates as many as three times this year. For e.g., the gap between the US 2-yr yield and the Fed funds rate was in excess of 100 basis points. At the time I questioned who would be right? Bonds or the Fed? Fast forward to today and the gap has closed considerably… bonds have now realigned with the Fed’s way of thinking; i.e. expect higher for longer