The Monday After Powell | Morning Express 08/29/2022

Posted: Aug. 29, 2022, 8:51 a.m.

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- Fed Chair Powell brought down the hammer Friday. Call it what you want, but it was not a ‘Pivot’. His narrow speech was intentional and straightforward, the Chair took no questions after.

o “Restoring price stability will take some time and requires using our tools forcefully to bring demand and supply into better balance. Reducing inflation is likely to require a sustained period of below-trend growth. Moreover, there will very likely be some softening of labor market conditions. While higher interest rates, slower growth, and softer labor market conditions will bring down inflation, they will also bring some pain to households and businesses. These are the unfortunate costs of reducing inflation. But a failure to restore price stability would mean far greater pain.”

o “While the lower inflation readings for July are welcome, a single month's improvement falls far short of what the Committee will need to see before we are confident that inflation is moving down.”

- Price action across assets whipsawed during and right after his speech, finding a direction distinctively lower.

- Briefly cushioning Powell’s strong hawkish verbiage, highlighted above, was a soft read on Core PCE (+0.1% MoM vs +0.3% exp), the Fed’s preferred inflation indicator 90 minutes before his speech, and lower than expected Michigan Inflation Expectations during his speech (1-year 4.8% vs 5.0% and 5-year Expectations 2.9% v 3.0%).

- The equity market was certainly caught offside, therefor pundits are calling Powell’s speech a ‘Pivot’. However, the Bond market, though lower today, has absorbed the hawkishness much better. Probabilities for a 75 basis point move in September have risen to 66.5%, but it is the added 25 basis points through yearend, totaling 150 bps between September, November, and December, that we find most significant. This steadily climbed after July’s Nonfarm Payrolls three weeks ago. At that time, it emerged at 17% and before Powell’s speech, stood at 37%. It concluded Friday at 40.9% and has risen to 51.1% this morning.

- In the end, the Fed is data dependent, “Our decision at the September meeting will depend on the totality of the incoming data and the evolving outlook. At some point, as the stance of monetary policy tightens further, it likely will become appropriate to slow the pace of increases.”

- The Euro has actually found some footing this morning, trading back above parity to the U.S. Dollar after ECB officials, in Jackson Hole over the weekend, lean into a 75 basis point hike at their September meeting. Spearheading the conversation was ECB board member Schnabel. This morning, a 75 basis point hike by the ECB is being priced in with roughly a 67% probability.

- Fed Vice Chair Brainard speaks today at 1:15 pm CT, however, it is very unlikely to hear a tone diverging from that of Chair Powell.

- More Fed speak and data as the week unfolds. Big focus on PMIs from China Tuesday evening and U.S. Nonfarm Payrolls Friday.