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“It doesn’t need to be better than what we’ve seen, or even as good. It just needs to be good.” – Jerome Powell
Below is a snippet of commentary from today’s Morning Lineup. Start a two-week trial to Bespoke Premium to view the full report.
After hitting record highs last week, sentiment in the equity market is a bit more subdued this morning as the major averages are all indicated to open modestly lower even as futures are off their overnight lows. Oil prices are lower while bond yields are higher. The only economic data on the calendar are PMIs for the services sector, and the rest of the week will be quiet on that front. We’re also past the peak of earnings season, but the pace will still be brisk. Already this morning, we have seen some notable reports from Caterpillar (CAT) and McDonald’s (MCD). Air Products (APD) is the only one of the major companies reporting that missed EPS forecasts, but the top-line results have been more mixed relative to expectations.
In his 60 Minutes interview on Sunday (taped on Thursday), Fed Chair Powell didn’t make any new headlines relative to his post-Fed meeting comments last Wednesday. He reiterated the stance that the FOMC would likely not be cutting rates at its March meeting by saying “it’s not likely that this committee will reach that level of confidence in time for the March meeting, which is in seven weeks.” But he also reiterated that getting to 2% inflation isn’t a pre-requisite for cutting rates: “I’ve said that we wouldn’t wait to get to 2% to cut rates. In fact, you know, we’re actively considering now going forward cutting rates, and on a 12-month basis inflation, you know, is not at 2%. It’s between 2-3%.” Those comments along with his statement on Wednesday that he repeated in the quote at the top suggest that as long as inflation data comes in as it has been or better, the Fed will be cutting rates by the summer. Powell may not have “seen his shadow” last week, but rate cuts are still coming, it’s just going to be later rather than earlier.
While there was nothing new in his comments in Sunday’s interview, market pricing for the number of rate cuts between now and the end of the year is more modest now than it was last week before Friday’s January employment report. The chart below shows the number of 25 bps cuts that the Fed Funds market had priced in at various points this year before last week’s meeting, after the meeting, and now this morning. After last week’s meeting when Powell took March off the table, the number of cuts priced in for that meeting declined, but at the margin, they increased for every other meeting from May through December. After investors have had a weekend to sleep on it and see Powell’s 60 Minutes comments plus a speech from Fed Governor Michelle Bowman on Friday, the number of cuts priced in has declined significantly for every meeting between now and December.
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