By José Torres
Federal Reserve Chairman Jerome Powell’s recent statements regarding the potential need for the central bank to take more aggressive actions to hamper inflation have been reinforced with stronger-than-expected labor market data from both ADP National Employment Report and Job Openings and Labor Turnover Survey (JOLTS).
In Congressional testimonies on March 7 and 8, Powell implied that the Fed may raise rates faster than previously anticipated due to stronger-than-expected economic data. He cited robust hiring, consumer spending, and factory data that illustrate sustained inflationary pressures.
Data releases in the next two weeks, such as the Jobs Report, Consumer Price Index, the Producer Price Index, and retail sales, may further reinforce the case for the Fed to raise the fed funds rate by 50 basis points (bps) at its March 22 meeting. In fact, odds of a 50bp hike later this month have risen to 72% while terminal rate expectations jumped to 5.63% for October.
Following recent sell-off, markets moved indecisively during Chair Powell’s testimony, trading between gains and losses. The JOLTS report pulled equities to their daily lows but the dip was quickly bought.
Yields have been more of a roller coaster, with the 2 and 10-year trading in a broad range of roughly 10 bps. At the moment, however, the 2-year is roughly unchanged at 5% while the 10-year is down 5 basis points to 3.93% on recession fears. Concerns of a global economic slowdown driven by a tighter fed and as a result a stronger dollar is also pulling down crude oil, its down 1.6% to $76.32 per barrel. The Dollar Index is down 10 bps to 105.50, taking a break from rallying to year-to-date highs.
With 2023 featuring significantly higher costs of capital alongside high and persistent inflation, the next few economic data releases are key to the direction of the Fed and financial markets as a result. Softer data may lead to a pleasant surprise in March, as the Fed may decide to take it easy with a 25 bp hike. Our in-house inflation and employment models point the other way: we expect payrolls and CPI to surprise to the upside, albeit modestly. Such an event will likely weigh on financial assets, propel bond yields and generate downside momentum for consumer spending which is living on borrowed time and borrowed money.
(Author is Senior Economist at Interactive Brokers)