Hawkish Fed Speak and Profit-Taking has Treasuries on the Back Foot

Hawkish Fed Speak Continues

• Treasuries are weaker this morning as some hawkish commentary late yesterday from Chair Powell and San Francisco Fed President Mary Daly reiterated the Fed’s commitment to squash inflation.

• Powell’s comments were interpreted differently by various outlets but he repeated his comment from the FOMC press conference that should inflation continue stronger than expected the Fed is prepared to do more. That implied to some that a 75bps hike is not off the table while others took at as extending the cadence of 50bps hikes further out the FOMC calendar. In any event, the market took the more hawkish spin and is running with it today. He also mentioned that if inflation improved faster than expected the Fed was prepared to do less but that was largely ignored.

• Mary Daly later last night mentioned that while financial conditions have tightened which is what they want, that tightening still has a ways to go. If you look at the Goldman Sachs Financial Conditions Index below you could say she is right. While conditions have no doubt tightened from last year, as the chart shows we’re basically back to the range that prevailed for years prior to the pandemic. That doesn’t seem to bode well for those of us hoping for a bottom in stocks to be found soon, like today would be good. It should also be noted that Daly was one of the more dovish members on the FOMC prior to the inflation dust-up so you can see the turn to the hawkish side is nearly complete across all participants.

• In a bit of good news, perhaps a very small bit, another price series was released this morning that implies peak inflation may be behind us. The Import/Export Price Index for April came in better-than-expected with some easing in monthly price pressures noted. Import prices were unchanged when a 0.6% gain was expected and compares favorably to the 2.9% gain in March. Ex-petroleum the index rose 0.4% vs. 0.7% expected and 1.2% in March. Export prices rose 0.6% vs. 0.7% expected and 4.1% in March. The YoY numbers still look awful with imports up 12.0% but that compares to 12.3% expected and 13.0% in March. Export prices YoY soared 18.0% vs. 19.2% expected and 18.6% in March. While the YoY numbers look terrible March may have been the high print for a number of price measures. We hope so anyway.

• Also out this morning we received our first read on consumer confidence in May from the University of Michigan Sentiment Survey and it was ugly. Expectations were for a small dip in sentiment to 64.0 from 65.2 in April but the actual missed widely coming in at 59.1. That’s the lowest reading of this cycle and the lowest since 2011. Sentiment has been sliding since April of last year when inflation readings started to accelerate. Consumer expectations also downshifted from 62.5 to 56.3, easily missing the 61.5 forecast. Consumers are obviously feeling the triple-whammy of inflation, higher rates, and sinking stock prices.  The survey also has an inflation expectations component which the Fed watches to see if higher inflation rates are starting to leak into future expectations. That doesn’t seem to be the case as the 1-year inflation expectation remained at 5.4% for a third straight month and the 5-10 year inflation expectation was 3.0% for a fourth straight month.

• As we mentioned above, Treasury prices are weaker this morning on the back of hawkish Fed comments, but it could also be a bit of weekly profit-taking setting in before the weekend. Recall the 10-year peaked intra-day on Monday at 3.20% and currently sits at 2.90% so some buyers who lifted Treasuries with a 3-handle yield could be taking their good fortune home with them.

Source: Bloomberg