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“Adventure is just bad planning.” – Roald Amundsen
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Welcome to the 8th and final FOMC policy announcement of the year. Maybe it’s just us, but we would have been fine with just one or two announcements this year and a whole lot fewer speeches. Markets are pricing in a near certainty of a 50 bps rate hike today bringing the Fed’s total interest rate increases for 2022 to 4.25 percentage points. While markets are pretty certain of what the Fed will do, the big question on everyone’s mind is what is Powell going to say.
Isn’t it ironic that in the age of maximum Fed transparency where Fed officials practically speak multiple times a day that investors really have no idea what kind of tone the Fed chair will take at his news conference today? Will he start off the disclaimer that the Fed is “strongly committed to bringing inflation back down to our 2 percent goal”? Hopefully, Powell got up on the right side of the bed this morning and traffic getting to K street wasn’t too bad.
Futures have been mixed all morning on what has been a quiet day for data. The only release on the calendar was Import and Export Prices. Import Prices fell more than expected (-0.6% vs -0.5%), and Export Prices fell less than expected (-0.3% vs -0.5%). At the end of the day, though, none of this matters. Whatever Powell says will dictate the tone of the day. Any hints of a pause or a lowering in the magnitude of rate hikes going forward will be what bulls need to keep the rally going.
Despite recent comments from FOMC officials looking to downplay the significance of inverted yield curves and their impact on the economy, market participants have been intently focused on both the quantity and persistency of inversion at various points on the US Treasury curve. One of the Fed’s preferred measures of the yield curve is the spread between the yields on the 10-year and 3-month US Treasuries. This morning, the 10y3m curve remains inverted by over 80 basis points (bps) which will mark the 15th straight trading day that the curve was inverted by 50 bps or more.
Going back to 1962, there have been four other periods where the 3m10y curve inverted by 50 bps or more for at least 15 straight trading days. Each of those prior streaks lasted much longer than the current streak, although, with the curve inverted by over 80 bps, this streak can also be expected to last much longer. In terms of where these streaks occurred in the business cycle, in each of the four periods, a recession followed within eight months.
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