Fed Chair Do-Over | Morning Express | 2/7/2023

Posted: Feb. 7, 2023, 8:28 a.m.

Fundamentals: Financial markets, after Friday’s blowout jobs report, have repriced the odds of the Federal Reserve’s terminal rate. Rate markets now favor hikes to 500-525bps and then for the Fed to hold. Essentially, the Fed tried communicating this last Wednesday, but it got lost in Chair Powell’s overconfident use of the word “disinflation”. In fact, there is now a higher probability at 30% versus 15% that the Fed will hike as high as 525-550bps through the summer rather than 475-500bps. However, those odds shift in the back half of the year and signal a 35.7% chance the Fed brings rates back below 5% before yearend. Regardless of Powell’s demeanor last week, the committee has been cohesive and adamant they have no plans on cutting this year.

At the end of last year, we at Blue Line Futures certainly feared a deteriorating economy, though we expected a resilient consumer in January. We have since learned the economy grew at a better pace than expected in Q4, consumer spending remained buoyant, and though wages were softening, they continued to expand at a historic pace. However, manufacturing was eroding, and there were early signs that the services sector was beginning to slip. Albeit services, ex-housing is the stickiest inflation component. As last week unfolded, JOLTs Job Openings hit a five-month high, with 762,000 more openings than expected, while Initial Jobless Claims again hit the lowest since April 2022, which was at the onset of the Fed’s first hike. The brightest spots were all exuded throughout Friday’s report and followed by an ISM Non-Manufacturing beat (services). Because of the market’s reaction function, our rhetoric was always that the Fed cannot signal a pause until the exact moment they are ready. Looking back to January, we have become more confident in the economy. Although this was one Nonfarm Payrolls report, the Fed cannot consider a pause until there is evidence businesses are not hiring at such a pace. If Friday’s report holds true, it signals wages are likely to levitate further, a leading indicator of inflation and economic activity broadly.

If the Fed cannot smother inflation, it will again percolate through the economy. Once inflation ebbs and flows, it will be much more difficult to tame. Fed Chair Powell gets a rare ‘do-over’ today, typically only reserved for backyard football or the final quarter of the AFC Championship game. In an interview with David Rubenstein at the Economic Club of Washington, D.C., at 11:40 am CT, will we hear Powell’s rhetoric account for the latest data? Or will we hear another victory lap touting disinflation? Let us not forget the Cleveland Fed Inflation Nowcast model forecasts January CPI at +0.63%, a seven-month high.

E-mini S&P (March) / NQ (June)

S&P, yesterday’s close: Settled at 4123.50, down 24.50

NQ, yesterday’s close: Settled at 12,515.50, down 108.50

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