Published Date 8/26/2022
Yesterday, the eve of Powell’s speech the 10 yr. yield fell 8 bps and MBS prices declined 35 bps; traders and investors lightening up ahead of what Mr. Powell will reveal when he talks at 10 am ET.
This morning the 10 yr. began +5 bps at 3.08% and MBS prices at 8:30 am down 12 bps, just a reference point because its all about how markets react to Powell’s remarks at 10 am.
July PCE released at 8:30 am was better than forecasts; m/m PCE expected +0.1% declined 0.1%, yr./yr. expected +6.3% was right on estimates. Core PCE expected +0.3%, as repported +0.1%, yr./yr. forecasts +4.7%, as reported +4.6%. Yet another look at inflation that continues to moderate over the last two months. July personal income didn’t meet forecasts of +0.6%, income up just 0.2%; personal spending was thought to be +0.4%, as reported +0.1%. There was no initial reaction to the data because it was reported prior to Powell at 10 am.
July advance US trade deficit expected at -$97.5B, as reported -$89.1B; imports -3.5% exports -0.2%.
Recently we are seeing and hearing more economists, pundits and analysts coming to the belief that inflation isn’t going to go away and get to where the Feed is targeting at 2.0%. The new and yet not a universal view is that inflation at higher levels will be with us for years to come. The Western world can expect to live with inflation running between 4% and 5% for years, and sharply lower asset prices as a result. The current outlook from Pascal Blanque, chairman of the Amundi Institute, he served as the CIO of Europe’s biggest asset manager for more than a decade before joining its research arm in February. The adjustment to higher-for-longer inflation, following a decade where US headline inflation averaged 2%, will involve a complete rethink in valuations from the equilibrium price-to-earnings ratios in stock markets to the level of bond yields. One man’s opinion but we are seeing more comments like this recently.
At 9:30 am the DJIA opened +27, NASDAQ -11, S&P -1. 10 yr. note at 9:30 am 3.05% +2 bps MBS prices -5 bps from yesterday’s close and +28 bps from 9:30 am yesterday.
At 10 am Powell: softening in labor markets, inflation spreading rates will result in household pain, US economy clearly slowing, labor market out of balance, still need to see inflation declining, restoring price stability will take time, he hopes to avoid price stability, Fed will continue to increase rates and alluded to the possibility of continued strong tightening. An unusually large increase could be appropriate at the Sept meeting.
The initial reaction didn’t move markets. The 10 yr. note unhanged and stock indexes holding. But by 10:30 am stocks declining and interest rates a little higher.
Source: TBWS
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