The recent volatility commenced with January’s unemployment data that far exceeded anyone’s estimates by a large factor. All are expecting revisions in the data, but the question is by what magnitude.
Friday is the release of February’s employment data. Will it validate January’s statistics? Will monetary policy assumptions change yet again?
Friday equities advanced even as the data highlighted resilience in the service sector, with the market believing that the Fed will not raise interest rates beyond peak levels already priced into the markets which is currently around 5.5%.
There are some who are now suggesting the overnight rate may need to be raised to 6.0% to quell inflationary pressures. The increase from February’s 2022 rate of 0.00% to today’s 5.0% rate is logarithmic. The current expected peak of 5.50% is almost inconsequential based upon the new denominator of 5.0%. A similar argument can be made if the rate does increase to 6.0%.
A major issue that is at hand is the necessity of the Fed maintaining its inflationary fighting prowess. Many believe its credibility has been severely damaged, but such damage is not reflected in the yields of longer dated debt based upon historical relationships.
If expectations come unanchored, another set of issues will arise.
The economic calendar is comprised of a number of top tier statistics including the JOLTS Job Opening data, factory and durable goods orders and multitude of jobs data ending Friday with the release of the BLS Employment report. As noted many times, January’s data vastly altered the potential direction of monetary policy.
FRB Chai Powell also testifies in front of Congress tomorrow and Wednesday about monetary policy and the state of the economy. Volatility could potentially increase.
Last night the foreign markets were up. London was down 0.57%, Paris up 0.14% and Frankfurt up 0.16%. China was down 0.19%, Japan up 1.11% and Hang Seng up 0.17%.
Futures are flat ahead or Powell’s testimony and upcoming job statistics. The 10-year is off 2/32 to yield 3.93%.
