Market Insights – March 5, 2018

March 5, 2018 Chatham Financial

Mr. Powell Takes Center Stage

View this week's rates.

Prior Week Summary

It was an interesting week for market watchers as Mr. Powell made his first remarks to Congress in his position as Chairman of the Fed. While Mr. Powell was widely expected to maintain the status quo and carry forward the policy stance of the prior Chair, he made headlines by placing his own perspective on the state of the economy and monetary policy. In his first formal remarks, Mr. Powell paid homage to Chair Yellen’s focus on the broad high-level improvements in the labor markets, while highlighting the groups that have benefited less from gains in overall employment. In response to Congressional inquiry on the Fed’s potential reaction to increasing economic growth, the Chairman potentially opened the door to four hikes this calendar year by stating “My personal outlook for the economy has strengthened since December.” We will have to wait for an updated dot plot after the March 21st meeting to see how Mr. Powell’s forecast is reflected in the consensus of the committee.

While the market popped higher in yield in response to this aspect of the Chairman’s testimony, his remarks overall were more balanced. In his prepared remarks, he stated “In gauging the appropriate path for monetary policy over the next few years, the FOMC will continue to strike a balance between avoiding an overheated economy and bringing PCE price inflation to 2 percent on a sustained basis. While many factors shape the economic outlook, some of the headwinds the U.S. economy faced in previous years have turned into tailwinds: In particular, fiscal policy has become more stimulative and foreign demand for U.S. exports is on a firmer trajectory.” As of this writing, there appears to be roughly 30% odds priced into the Fed Funds Futures market for a total of four 25 basis point hikes during 2018, up from less than 5% in the past few weeks. After a bit of volatile trading during the week, yields actually ended fairly close to where they began the week as talk of a potential trade war weighed on equities, and pushed yields lower.

The Look Forward

Markets will look for direction this week from the February employment report on Friday, as well as any additional rhetoric on our trade posture. The consensus expectation for the employment report is a gain of 200,000 jobs, and a slight tick lower in the unemployment rate to 4.0%. There is a full roster of Fed speakers this week as well as a busy auction calendar.

 

Rates Snapshot

Sources: Bloomberg Finance L.P., (Treasuries) Chatham Financial (Swap Curves), FHLB Boston, Chicago, Dallas, Des Moines for FHLB Advance Rates. Wells Fargo Brokered CD Indications.

 

Market Implied Policy Path (Overnight Indexed Swap Rates)

Source: Chatham Financial

 

Fixed Income Snapshot

Source: Bloomberg Finance L.P.

 

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Market Insights – March 12, 2018
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