Evening Brief – 03.07.23

Federal Reserve Chairman Jerome Powell testified before the Senate Banking Committee Tuesday as part of his semiannual appearance before Congress. Powell attempted to strike a balance between highlighting progress on curbing inflation, leaning on the strong labor market as an achievement rather than a headwind, while also noting the FOMC has more to do as risks to the inflation outlook remain skewed to the upside.

“…we continue to anticipate that ongoing increases in the target range for the federal funds rate will be appropriate in order to attain a stance of monetary policy that is sufficiently restrictive to return inflation to 2 percent over time,” noted Powell in prepared remarks.

None of this is new, of course, but the equity market did not like the message, with the S&P500 declining 1.53% and snapping a four-day win streak. The Fed’s terminal rate expectations jumped to 5.60% from 5.50% the previous day, with the odds of a 50bps hike in March and May spiking to 50% and 36%, respectively.

The short end of the yield curve raced higher, with the 2-year yield hitting 5%, its highest level since 2007 and likely to gain further upside momentum; the yield has risen 90bps since the Fed last met on February 2. Meanwhile, the 2s/10s yield spread is now the most inverted since 1981 at –0.91%.

The markets will now look to Friday’s US payrolls report, which will likely show a still resilient labor market, and next week’s inflation prints for clues that the data-dependent central bank is leaning towards a 50bps hike at its next two-day meeting on March 21-22, unless proven otherwise.