Markets Still Adjusting to Jackson Hole
- Treasury yields continue to adjust from the tough talk at Jackson Hole last Friday, and that adjustment is mostly in the form of higher yields. The 2yr note overnight briefly hit 3.48% which eclipsed the 3.43% high set back in mid-June. That’s the highest 2yr yield since 2007 and reflects the market’s appreciation of the higher-for-longer message that Fed Chair Powell left with investors.
- While Powell didn’t mention a specific terminal fed funds rate in his speech, several Fed officials interviewed at Jackson Hole mentioned that a 3.50% to 3.75% level represented their best guess as the rate necessary to return inflation to 2%. That is largely in line with market expectations. What was stressed by Powell, however, was the need to keep the terminal rate in place for longer than investors may think.
- Powell referenced the 70’s as a period when policy was too quickly loosened, resulting in inflation reigniting and requiring a second and more severe tightening response. That implies expecting rate cuts in 2023 may be a bit too quick and that is what the short end of the market is adjusting to this morning.
- While the Fed’s message has been firm that rate hikes will be coming almost regardless of economic data, we are reminded that the Jackson Hole speech last year was one of keeping policy loose to facilitate a return to maximum employment, and that inflation risks would be temporary. So, despite the forceful and self-assured talk of tightening and holding rates steady for the foreseeable future, events can intrude and affect Fed policy.
- While it may be true that the Fed will be tightening, the question is whether September will be a 50 or 75bps hike. The market is leaning in the direction of a 75bps hike. If the Fed feels the market is expecting 75bps, why not deliver it?
- With September 1st falling on Thursday, we will get our first look at August economic results with the ISM Manufacturing Survey (51.9 expected vs. 52.8% in July). If that comes to pass it will signal a slowing in the manufacturing sector but still not in contraction mode, at least not yet.
- The other big release will be the jobs report on Friday. Expectations are for some slowing in job creation to 300 thousand from 528 thousand in July. We say “slowing” somewhat tongue-in-cheek as a 300k jobs number pre-pandemic would have been quite impressive. Thus, it’s likely that a consensus print will bolster the case for a 75bps rate hike on September 21.
Agency Indications — FNMA / FHLMC Callable Rates
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