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Will Powell Kickoff the Next Round of Market Volatility?



We are nearly through the first month of data, sitting squarely between the Fed’s 75bps hike in July and the September FOMC meeting. After an extremely strong employment report and surprising softness from the inflation data, we can conclude that there is no easy button to be found. The market will now look to Powell’s communication at Jackson Hole for any signaling around the pace of future rate hikes. The multi trillion-dollar question is will Powell toe the party line, or will he kickoff the next round of market volatility?

The Consumer Remains Strong:

  • Nonfarm payrolls were incredibly strong, adding 528k jobs in July with the unemployment rate at 3.5%, wages up 5.2% YoY and hours worked at 34.6.
  • JOLTS (Job Openings, Labor Turnover) shows ~10.7mm jobs available.
  • ISM services marked a 3-month high, surprising the market with strength from both business activity and orders.
  • Retail sales ex-auto and gas rose 0.7% showing that the consumer continues to spend.



Graphical user interface, chart Description automatically generatedSource: Bloomberg, 8/5/2022


ISM Services PMI

Graphical user interface, chart Description automatically generatedSource: Bloomberg, 8/3/2022


Retail Sales Ex-Auto and Gas

Graphical user interface, chart Description automatically generatedSource: Bloomberg, 8/17/2022


Inflation may be peaking:

  • Oil has been on a downward trend since June bringing relief to the pump with national average gasoline prices back below $4/gallon.
  • ISM Manufacturing Prices Paid are down to 60 from a high of 92 while the Producer Price Index finally started to ease in July.
  • The Consumer Price Index shocked the market in the July report; the Headline was flat and softened to 8.5% YoY from 9.1% in the June release. Core marked 0.3% this month and held at 5.9% YoY.


Oil vs. Gasoline

Chart, histogram Description automatically generated Source: Bloomberg, 8/23/2022



ISM Manufacturing Prices Paid vs. PPI Ex Food/Energy/Trade YoY

Chart Description automatically generatedSource: Bloomberg, 8/20/2022


Consumer Prices Index vs. Core CPI

A screenshot of a computer Description automatically generated with low confidenceSource: Bloomberg, 8/10/2022


Fed communication has been hawkish:

  • Fed commentary acknowledges strength from the consumer, that they are seeing “improvement from prices but not declaring victory,” and will move rates into somewhat restrictive territory but the idea that the Fed will cut rates next year seems “unrealistic.”
  • James Bullard wants the Fed Funds rate at 3.75-4% by year-end, believes “front-loading” is the best strategy and expects rates will be “higher for longer.”
  • Loretta Mester believes further hikes are warranted and that we “are not in a recession.”
  • Michelle Bowman wants to consider large hikes (75bps) until “we see inflation declining in a consistent, meaningful, and lasting way.”


What’s Next?

  • Jackson Hole will be held August 25-27 and is a great platform for the Fed Chair to communicate with markets. The theme of the symposium this year is “Reassessing Constraints on the Economy and Policy.”
  • We have one more round of employment and inflation data ahead of the September FOMC meeting.
  • The Fed’s hope is that Monetary Policy will work to slow demand but acknowledges that it works with a lag. Fed members have been hawkishly-leaning thus far and are waiting on one more month of data for further evidence as to how the mechanism is filtering into the economy.
  • We will continue to watch interest rate probabilities, the 2-yr Treasury, and yield curves for signals that the Fed is nearing the end of the hiking cycle.



U.S. Interest Rate Probability

A picture containing graphical user interface Description automatically generatedSource: World Interest Rate Probability, Bloomberg, 8/23/2022


2-yr U.S. Treasury vs. Fed Funds Rate

Chart, histogram Description automatically generatedSource: Bloomberg, 8/19/2022


2-yr U.S. Treasury Minus 10-yr U.S. Treasury Curve

Chart, histogram Description automatically generatedSource: Bloomberg, 8/23/2022


While we have been encouraged by the Fed’s willingness to shift to a data-dependent stance going forward, the Fed is getting mixed messages within the data. While inflation may be peaking, the strong labor market goes against the Fed’s attempt to slow demand. The Fed’s fight to bring inflation back to the 2% target is not over yet, however, there is a tiny glimmer of hope that they still may land this plane smoothly and avoid a recession.



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