50bps back on the table...
What we need to see in the macro picture
We had some idea that Powell would come out hawkish, given the hotter inflation numbers that we just saw.
If we’ve learned anything in the last few months - it’s that controlling inflation still remains the number one priority for the Fed. And, as long as the labor market remains tight, the Fed can continue to hike. Not just that, the tight labor market is actually a contributor to inflation, as wages remain high.
After yesterday’s "hawkish surprise”, short-term rates shot up, the S&P dropped 60points falling 1.5% and the US Dollar Index crossed back above 105.
With Powell’s prepared remarks - the Fed Funds Futures are now pricing in a 50bps (0.50%) hike for the meeting on March 22 after a slowdown to 25bps in Feb, and the odds of a 6% terminal rate rose to 32%.
The 2-year yield crossed 5% for the first time since 2007 and the Yield Curve Inversion reached -104bps. While there are lot of people who seem to disagree whether the inversion of the Yield Curve can foretell a recession, the truth is this we’re looking at serious economic slowdown. And in fact, that’s somewhat warranted.
There are more supporters than dissenters and the long end of the curve is telling us that the market believes a recession is coming. I discussed the inversion for the first time in Oct 2021, but I never thought I’d be experiencing one of the longest and deepest inversions of our lifetimes.
I’ve been talking about a wage spiral for a long time and one of the issues we’re beginning to see now is the resurgence of inflation - particularly because the services sector remains strong, which is dominated by labor.
Look out for the Unemployment Report on Friday because a strong jobs report gives the Fed yet more reason to be able to tighten.
One major issue that was addressed during yesterday’s congressional hearing was corporate greed and corporate profits. Well, we’ve known for the past few months that companies have increased prices to cover costs from supply chain disruptions and shortages of workers. Basically, we have another spiral - cost-push inflation. As costs go up, companies raise prices and now that costs are beginning to abate, we see profit margins expanding because prices still remain high.
This is not changing fast enough. While the discussion on corporate profits were taken a tad too far on the political spectrum during the hearing, there is some truth to the fact that we need to see corporate margins come down, and therefore corporate earnings.
So, what else do we need to see in the economy and where do we stand? Read on to find out…