Powell has bond traders where he wants them: full of skepticism

Powell has bond traders where he wants them: full of skepticism

(Bloomberg) — Jerome Powell has the bond market exactly where he wants it: he lacks conviction about the Federal Reserve’s next steps.

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It’s a scenario — evident in part by the split futures positioning — that gives the Fed chairman and his colleagues leeway to quickly adjust policy in the coming months as economic data comes out, without having to worry about potentially roiling the world’s largest fixed-income market.

Powell said in a speech on Friday in Wyoming that the central bank is ready to tighten monetary policy again if needed to rein in inflation. For investors, it means that reports such as next week’s monthly jobs data will be crucial, and that it will be difficult to crown a winner in the battle between bulls and bears anytime soon, even with Treasuries poised for four months in a row. of losses.

Mohamed El-Erian, chief economic adviser at Allianz SE and a columnist for Bloomberg told Bloomberg Television that Powell “reserved maximum political options.”

Read more: In some ways, the Fed’s tightening actually hits hard: Macro man

The 10-year yield ended the week just above 4.2%, after touching 4.36% for the week, the highest level since 2007. US Treasurys lost 1.3% this month through Thursday, leaving them slightly down for 2023, according to the Bloomberg Index. .

two camps

There is still a lot of debate about how to handle the bond market nearly 18 months after the Fed began its tightening campaign.

Some of the world’s largest money managers, including JPMorgan Asset Management and TCW Group, see an opportunity to boost their bullish bets as record yields rise. It’s a camp that expects the Fed’s cumulative tightening and nearly half-point jump since June in 10-year yields to trigger a recession and make rate cuts inevitable in 2024.

Meanwhile, with inflation proving flat and the US ramping up Treasury issuance, hedge funds tend to go short. Bill Dudley, former president of the Federal Reserve Bank of New York and now contributor to Bloomberg, says he doubts that “the bond bull market that began in the early 1980s is over.”

Read more: Farewell to the US Treasury bull market: Bill Dudley

It is a backdrop that once again assures investors that economic data will be key to determining the Fed’s path and value in the bond market. Swap traders are bidding about a two-thirds chance that the central bank will raise its key interest rate by a quarter of a percentage point in November after a possible pause next month.

The first pivotal release comes with data on job creation in August. The medium outlook points to a continued sluggishness in the labor market, which the Fed continues to deem very hawkish. Ahead of their meeting on September 19-20, officials will also get a fresh reading on consumer price inflation.

“The market has been in a window where data is secondary, and it’s a matter of waiting for September, and that starts with the jobs report on Friday,” said Jack McIntyre, portfolio manager at Brandywine Global Investment Management. At this point, the trajectory of inflation and wages “has a larger influence than supply on the longer-term direction of earnings”.

Tiffany Wilding, an economist at Pacific Investment Management Co, warned clients this week that it is “not unreasonable” for the Fed to hold off for a while and then raise interest rates in 2024 if the consumer and economy remain resilient.

Another key part of the conversation is that many investors are assessing whether structural forces have changed in the economy such that the Fed’s long-term neutral interest rate has risen. The discussion is another catalyst behind the recent rally in long-term yields.

What does Bloomberg Economics say…

“If long and variable periods of previous rate hikes affect the economy at the end of this year — when Bloomberg Economics forecasts a recession — the argument that the neutral rate is low could gain traction.”

—Anna Wong, chief US economist

For the full note, click here

“We view the current policy stance as constraining, putting downward pressure on economic activity, employment and inflation,” Powell said in his speech on Friday. “But we cannot say with certainty the neutral interest rate, so there is always uncertainty about the exact level of monetary policy constraints.”

what do you want to watch

  • Economic Data Calendar:

    • Aug. 28: Manufacturing activity from the Federal Reserve Bank of Dallas

    • Aug. 29: FHA Home Price Index; S&P Core Logic CS; job opportunities in gulets; consumer confidence; Service activity of the Federal Reserve Bank of Dallas

    • August 30: Applications for the MBA in Real Estate Business; ADP staffing change; trade balance gross domestic product; wholesale stocks; personal consumption; basic personal consumption expenditures; retail stocks; Pending home sales

    • August 31st: Weekly Unemployment Claims. Challenger job cuts. personal income/expenditure: personal consumption expenditure deflator; Chicago Purchasing Managers Index (MNI).

    • September 1: US monthly jobs report; Global Manufacturing PMI from Standard & Poor’s in the US; construction spending; manufacturing/prices paid/hiring/new orders; Vehicle sales suites

  • Fed Calendar:

    • Aug. 28: Fed Vice Chairman of Oversight Michael Barr

    • August 29: Br

    • August 31: Federal Reserve Bank of Atlanta President Raphael Bostick. Boston Fed President Susan Collins

    • September 1: Bostick: Cleveland Federal Reserve Bank President Loretta Mester

  • Auction calendar:

    • August 28: Bills 13 and 26 weeks old; Notes 2 and 5 years old

    • August 29: 42-day cash management bills; 7 year old diary

    • August 30: 17-week billings

    • August 31: 4- and 8-week bills

–With assistance from Edward Bolingbroke and Yi Shih.

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