The collapse of SVB and tightening financial conditions has put the Fed in a very difficult spot. For example, prior to the collapse they had a green light to raise at least 25 bps. Not now. Tightening rates could cause further pressure in the banking sector. However, if they choose not to – what signal does that send. There are no easy choices…
Fed Reserve
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Powell’s Punch
In what was supposed to be a ‘vanilla’ testimony to Congress – Jay Powell turned this into a market moving event. Not pleased with how market participants interpreted his previous address – he set the record straight that rates will be higher for longer. His testimony left no room for ambiguity – it was full hawk. Markets quickly revised their forecasts for the peak Fed funds rate – with some now thinking 6.00%. What’s more, the 2/10 yield curve is now negative 107 basis points. We have not seen that since 1981. Soft landing? Good luck.
10-Year Yields Continue to Rise… Why this Matters
The bond market has connected the dots – rates are likely to stay higher for a lot longer. This has seen yields all along the curve surge… with the 10-year now back above 4.0%. The 2-year has moved 100 bps in just 4 weeks. This has implications for stocks and their valuations… none of it great. Look for the 10-year to push higher – perhaps to 4.4% – which represents opportunity for investors.