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Why the Fed Wants Higher Rates

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What’s in Today’s Report:

  • Why Would the Fed Keep Hiking Rates if Inflation Is Coming Down?
  • Jobless Claims Chart – Critical to See Further Move Higher

Equity futures are modestly higher this morning as traders weigh renewed optimism about Chinese growth against more hawkish policy speak from multiple ECB officials, including President Lagarde, reiterating the need for a “higher for longer” policy rate path.

Premier Li of China confirmed the government is committed to achieving their 5% GDP target overnight which helped Asian markets outperform and fueled modest risk-on money flows around the globe.

Today’s list of economic data releases is a long one with Durable Goods Orders (E: -1.0%), Case-Shiller Home Price Index (E: 0.5%), FHFA House Price Index (E: 0.4%), Consumer Confidence (E: 103.7), and New Home Sales (E: 663K).

Beyond those economic reports, there are no Fed officials scheduled to speak today but there is a 5-Yr Treasury Note Auction at 1:00 p.m. ET that could move yields and influence equity market trading.

Bottom line, in order for markets to stabilize here and stocks to resume their 2023 rally, we will need to see signs of slowing, but not collapsing growth in today’s economic data and no surprises in the Treasury auction. Looking ahead, trading may slow down some today as investors position into tomorrow’s Central Bank Forum hosted by the ECB in which Fed Chair Powell will participate.

Fed Takeaways

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What’s in Today’s Report:

  • Is the More-Dovish-Than-Expected Fed Decision a Bullish Gamechanger? No. Here’s Why
  • Fed Decision Takeaways
  • EIA Data Takeaways and Oil Update

U.S. equity futures are rebounding modestly this morning but the price action is tentative as yesterday’s volatile reaction to the Fed decision and Yellen’s push back on “blanket” deposit guarantees are digested.

Looking overseas, the Swiss National Bank moved forward with a 50 bp rate hike overnight which showed policy makers’ increased confidence in the global banking system and continued commitment to reign in inflation pressures.

Looking into today’s session, there are a few economic reports to watch including: Jobless Claims (E: 195K) and New Home Sales (E: 645K).

There are no Fed officials scheduled to speak today but there is a 10-Yr TIPS auction at 1:00 p.m. ET which could offer some insight to the market’s view of long term inflation trends.

Bottom line, the late day selloff in equities yesterday was once again led by bank stocks after Treasury Secretary Yellen pushed back on the idea of expanded deposit insurance levels and today, that means bank stocks will again be in focus. If banks are able to stabilize, stocks broadly should be able to as well, but if we see more selling pressure, expect more volatility over the course of the day.

Tom Essaye Interviewed on BNN Bloomberg’s Morning Markets on March 10th, 2023

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A 50bps hike is entirely possible for the U.S. after today’s jobs data: Tom Essaye

Tom Essaye, founder and president of Sevens Report Research, joins BNN Bloomberg to discuss the latest movements in the markets after today’s jobs data. Essaye is expecting another big hike from the Fed at the upcoming meeting and discusses his take on SVP bank’s halt in trading, Silvergate’s shutdown and bitcoin. He says 2023 will be volatile and investors should remain conservative. Click here to watch the full interview.

Powell Testimony Takeaways

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What’s in Today’s Report:

  • What Powell’s Comments Mean for Markets
  • Powell Testimony Takeaways

Stock futures are stable as yesterday’s Powell-driven losses continue to be digested while the yield curve is hitting new cycle lows with the 2-Yr Note holding above 5% for the first time since 2007 while the 10-Yr hovers just below 4%.

Economic focus was on German data o/n as Industrial Production topped estimates while the previous Retail Sales print was revised notably higher, bolstering Bund yields.

Looking into today’s session, focus will be on labor market data early, especially considering Powell’s “data dependent” policy comments from yesterday’s testimony.

The ADP Employment Report (E: 175K) will hit the wires before the bell and then JOLTS (E: 10.6 million) will be released after the open. Investors want to see some deterioration in the jobs market but not an all-out collapse while any indication of declining wages would be well received. International Trade in Goods and Services (E: -$69.0B) will also be released this morning but is less likely to move markets.

From there, Powell’s two-day testimony continues before the House Banking Committee today at 10:00 a.m. ET and investors will continue to listen intently for further clues about policy plans and terminal rate expectations.

Finally, there is a 10-Year Treasury Note auction at 1:00 p.m. ET that could move yields and ultimately impact the bond market, specifically if the auction tails and rates move meaningfully higher.

Fed Pause Playbook & Powell Preview

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What’s in Today’s Report:

  • Fed Pause Playbook
  • Powell Testimony Preview
  • Chart – Return Comparison After the Last Rate Hike Pauses

U.S. equity futures are trading with tentative gains amid a stable bond market following good data out of Europe as focus shifts to Powell’s Congressional testimony today.

The ECB’s latest consumer survey showed a notable drop from 3.0% to 2.5% in three year inflation expectations which is helping bonds stabilize while German Manufacturers Orders came in at 1.0% vs. (E) -0.6%, underscoring a resilient Eurozone economy.

This morning, focus will be exclusively on Powell testimony before the Senate which begins at 10:00 a.m. ET as investors will be looking for any new insight on the pace of future rate hikes (25 or 50 basis point hike this month?) and/or the expected terminal rate (currently priced in near 5.375%). If Powell strikes a hawkish tone, expect volatility in stocks amid a potentially sharp rise in yields.

Looking into the afternoon, there is a 3-Yr Treasury Note auction at 1:00 p.m. ET which should offer some clues to how the bond market digests Powell’s first day of Congressional testimony (a badly tailing auction could further weigh on stocks), while there is one economic report due out late in the day: Consumer Credit (E: $26.4B), but unless the number comes in well above estimates, it should not move markets.

Why Fed Rate Hike Expectations Are Still Rising

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What’s in Today’s Report:

  • Why Fed Rate Hike Expectations Are Still Rising
  • Did Yesterday’s Economic Data Signal Stagflation?
  • EIA Analysis and Oil Market Update

Futures are extending Wednesday’s declines and are moderately lower as more global inflation data came in hotter than expected.

Euro Zone HICP rose 8.5% vs. (E) 8.2% y/y and joined French, Spanish and German CPIs as signaling a bounce back in inflation.  That’s pushing global yields higher and weighing on futures (just like it weighed on stocks on Wednesday).

Today focus will remain on economic data and the key report is Unit Labor Costs (E: 1.4%).  Wages are a major source of inflation the Fed is trying to bring down, so if Unit Labor Costs are lower than expected, that will likely cause a bounce in stocks and bonds.  Other notable events today include Jobless Claims (E: 200K) and two Fed speakers, Waller (4:00 p.m. ET) and Kashkari (6:00 p.m. ET), although they shouldn’t move markets.

Tom Essaye Quoted in Forbes on February 21st, 2023

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‘Damage Is Done’: Stock Market Likely Set For Another Plunge As Economic Warning Signs Abound, JPMorgan Cautions

“Markets are admitting the Fed may not be close to done,” Sevens Report strategist Tom Essaye wrote in a Tuesday note, as stocks sank following worse-than-expected retail earnings. Click here to read the full article.

Was Powell’s Press Conference A Bullish Gamechanger?

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What’s in Today’s Report:

  • Why Did Stocks Rally During Powell’s Press Conference?
  • Was the FOMC Decision A Bullish Gamechanger (No, But It Was a Positive Event)
  • EIA Update and Oil Market Analysis

Futures are solidly higher on continued momentum from Wednesday’s “not hawkish” post-FOMC rally and following better-than-expected META earnings.

META surged 19% overnight as the company reported better-than-feared earnings driven by gains in artificial intelligence and aggressive cost-cutting.

Today will be a very busy day of micro and macro-economic events as we get major central bank decisions, more important economic data, and key earnings.

First, this morning there are two central bank decisions:  BOE Rate Decision (E: 50 bps hike) and ECB Rate Decision (E: 50 bps hit).  If either is overtly hawkish (maybe the ECB) it could send global yields higher and take back some of yesterday’s rally.

After those two central bank decisions, we get an update on the labor market via Jobless Claims (E: 193K),  inflation via Productivity & Costs (E: 2.4%, 1.5%), and economic growth via Factory Orders (E: 2.2%).  Especially in light of Powell’s not hawkish press conference, data that shows stability and declining price pressures will support stocks.

Finally, on earnings, today is likely the single most important day of the earnings season as we get results from three of the most widely held stocks in the market:  AAPL ($1.93), AMZN ($0.15), and GOOGL ($1.14).

Tom Essaye Quoted in Blockworks on January 30th, 2023

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Fed Watch: Bitcoin Gives Up Weekend Gains, Analysts Say Not To Worry

“Reaching peak hawkishness is one of our three keys to a bottom, and the most important one, so if the Fed has reached peak hawkishness that’s a powerful positive to consider,” Tom Essaye, founder of Sevens Report Research, wrote in a note Monday. Click here to read the full article.

Tom Essaye Quoted in MarketWatch on January 24th, 2023

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Tech rally is ‘biggest game of chicken between the Fed and the market I’ve ever seen’: analyst

“We are now witnessing the biggest game of ‘Chicken’ between the Fed (who says rates are going to above 5%) and the market (who thinks the Fed cuts rates at least twice this year) that I’ve ever seen,” said Tom Essaye, founder of Sevens Report Research, in a Tuesday newsletter. Click here to read the full article.