Well…Fed Chairman Jerome Powell held his first testimony on Capital Hill yesterday and it didn’t take market participants long to key in on the possibility of the Fed raising rates more than the anticipated 3 times in 2018. Prior to his testimony, prepared remarks were publicly released. The most balanced of the remarks was as follows: “In gauging the appropriate path for monetary policy over the next few years, the FOMC will continue to strike a balance between avoiding an overheated economy and bringing PCE price inflation to 2 percent on a sustained basis.”
Rep. Carolyn Maloney, a Democrat from New York, asked Powell the question that was on everyone’s mind yesterday, “What would cause the Federal Reserve to hike more than three times that the central bank’s guidance currently calls for?” And the Fed Chairman responded by saying the following:
“You’re right that every quarter, every participant in the FOMC submits a projection of what they feel is going to happen to the economy and also their projection for appropriate monetary policy. And at the December meeting, the median participant called for three rate increases in 2018. Now since then — we will submit another projection, all of us, in three weeks — but since then, what we’ve seen is incoming data that suggests that strengthening in the economy. We’ve seen continuing strength in the labor market. We’ve seen some data that will, in my case, add some confidence to my view that inflation is moving up to target. We’ve also seen continued strength around the globe, and we’ve seen fiscal policy become more stimulative. So I think each of us is going to be taking the developments since the December meeting into account and writing down our new rate paths as we go into the March meeting, and I wouldn’t want to prejudge that.”
“New rate” path doesn’t necessarily mean modified to represent 4 rate hikes, but rather the process the voting Fed members embark on for each scheduled meeting. A may be just that the new rate path does still represent 3 rate hikes, but we won’t know for sure until the next meeting notes are released. Nonetheless, the markets seem to believe that 4 rate hikes may be in the cards for 2018. This sentiment was firstly felt in the U.S. 10yr. Treasury yield which shot up to 2.955% on Powell’s testimony, followed by a vast market sell-off in equities. All three major market indexes finished lower yesterday by greater than 1.15% on the day. As has also been the case during the month of February, the VIX soared by nearly 20% to over 18.5 on the day.
Markets are bouncing back a bit though, in early Wednesday trading, with equity futures higher and as the 10yr. Treasury yield has dipped back below 2.90% at the moment. So if you don’t think rate hikes and reflation is driving the markets lately, yesterday was a clear sign of the correlation. At present, it looks as if all 3 major averages will assume a monthly decline.
In terms of economic data for the day, the 2nd estimate for fourth-quarter U.S. gross domestic product comes out at 8:30 a.m. Eastern Time, with economists polled by MarketWatch expected to see 2.5% growth. The first estimate showed growth of 2.6%. At 9:45 a.m. Eastern, the Chicago PMI for February is due out, followed by a reading on pending home sales for January at 10 a.m. Eastern. Earnings are expected Wednesday from TJX Cos., Salesforce.com Inc., Lowe’s Cos., Office Depot Inc., Mylan NV, Hostess Brands Inc, L Brands Inc. and Monster Beverage Corporation.
It shouldn’t surprise investors and traders at this point if we see another 1% move in the markets today given the level of the VIX and daily index trends. Keep in mind, Fed Powell will give his next testimony to a Senate panel on Thursday, so there may yet be more market fireworks to come.
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