An Impeccable One-Two Punch | Morning Express 9/7/2022

Posted: Sept. 7, 2022, 9:10 a.m.

E-mini S&P (September) / NQ (September)

S&P, yesterday’s close: Settled at 3910.50, down 14.00

NQ, yesterday’s close: Settled at 12,019.00, down 85.25

Fundamentals: There are many things happening in the bond market, but with the curve broadly steepening for about a month, these are now the two biggest. The Federal Reserve is reducing its balance sheet and rate hike probabilities are mounting. This month, the central bank doubled the pace in which it will unwind its balance sheet to $90 billion per month. Also, a new wave of hawkish expectations are emerging. A 75 basis point hike later this month is now priced in with a 78% probability. This paves the way for at least 150 basis points through yearend with an 82.9% probability, and odds of 175 have emerged at 5.6%. One month ago, even after a strong July jobs report the odds for 150 were merely 22%. The Federal Reserve is getting exactly what they want, and Fed Chair Powell’s Jackson Hole speech was impeccably timed. He delivered a narrow and deliberately hawkish rhetoric no one could ignore, right in front of an air pocket in the bond market. Prior to his speech, markets were pricing in some likeliness of rate cuts by mid-2023. Now, those 150 basis points being discounted through yearend are expected to hold through next June with an 80.6% probability. The 30-year Bond has broken down and its yield hit the highest since June 2014 (3.514%) yesterday. Given this and the shift in rate hike expectations, the 2-10-year yield curve has steepened by 20 basis points since Powell’s speech, back to -15 basis points. Although risk-sentiment is roiling, this is arguably very constructive over the intermediate-term.

Do not miss our daily Midday Market Minute, from yesterday.

You see, inflation may be trying to peak but would remain buoyant if conditions were too loose. Powell’s impeccable timing, a one-two punch if you will, is not only intended to suppress inflation but an attempt to bury this wave six feet under. Make no mistake, as we wrote about through the spring, there will be many battles against inflation within a much larger war. We now have one week until next Tuesday’s CPI data. The Cleveland Fed Inflation Nowcast has revised August headline inflation lower to +0.06% MoM, but September is expected at +0.42% MoM. When the rise of inflation was expected to dissipate in July, expectations for August were following. This allowed the Federal Reserve to catch its breath, but with September’s indicators re-elevating, it forced the more deliberate approach.

This leads into comments from Fed speakers today and tomorrow. Richmond Fed President Barkin, who does not vote until 2024, speaks at 8:00 am CT. Cleveland Fed President Mester, a 2022 voter, is at 9:00 am CT. Fed Vice Chair Brainard is scheduled for 11:35 am CT, and Fed Governor Barr speaks at 1:00 pm CT. Tomorrow, Fed Chair Powell speaks at 8:10 am CT, coinciding with the ECB policy announcement at 7:15 am CT and ECB President Lagarde’s press conference afterward.

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