Federal Reserve Chair Jerome Powell is getting set to take part in an economic discussion Friday. With inflation continuing to cool, treasury yields plunging and recent dovish Fedspeak, investors will be listening to hear Fed Chair Powell will hint at a pivot or use a more hawkish tone.
There was some more positive data Thursday to support the doves. Headline inflation was flat month over month and up 3% on the year. Economists had expected it to rise 0.1% compared to last month, with an annual increase of 3.1%. Core PCE, the Fed's preferred gauge of inflation, was in line with economists' expectations. The core number excludes volatile food and energy prices.
Further, first-time unemployment claims rose to 218,000 vs. 211,000 in the previous week. This was below expectations. But continuing claims vaulted to 1.93 million, up 86,000 from the previous week. This was highest level since Nov. 27, 2021. Both these metrics are positive for interest rate doves because they show both prices and the labor market cooling off.
Treasury Yields Plunge; Fed May Still Raise Rates
There is no doubt that Treasury yields have been under pressure. The 10-year Treasury yield fell to 4.27% on Wednesday, the lowest since mid-September, extending big losses so far this week. It did move up slightly Thursday afternoon to 4.33%.
In addition, the Cboe 10 Year Treasury Note Yield Index is now trading nearly 7% below its 50-day moving average, a key technical level.
Conversely, the S&P 500 and the Nasdaq composite have rallied. The SPDR S&P 500 ETF Trust, which is based on the S&P 500, is now up more than 19% so far this year.
S&P Global Ratings said this week in a forecast that it expects Powell and his colleagues to buck current thinking on rates.
"We are not convinced yet that the Fed is done hiking. Tighter-than-anticipated financial conditions led the Fed to hold policy rate steady at 5.25%-5.50% on Nov. 1. Since then, financial conditions have eased somewhat (paradoxically increasing the chances of another rate hike)," it said in Tuesday's note.
There were a few factors affecting S&P Global's opinion. First, the Treasury announced debt issuance will be weighed more toward the shorter duration in the coming months. It also thinks markets may have been overenthusiastic in assuming further rate hikes are completely off the table. And in pulling forward projections for the first rate cut to mid-spring of next year following the CPI report.
Because of this, S&P Global thinks there will be another 25 basis-point rate hike, likely in December, before rate cuts begin in mid-2024.
Fed Chair Powell Expected To Take Consistent Stance
But B. Riley Financial Chief Market Analyst Art Hogan told IBD there are too many indicators showing interest rates should not move higher.
"I would push back on the idea that the Fed will raise rates at the December 13th meeting. The three drivers of that opinion are inflation is moving lower; economic data is getting softer; and the consensus of the recent Fed speakers has shifted from 'how high' to 'how long,' " he said. "The Fed funds consensus for the Dec. 13 meeting shows less than a 5% chance of another rate hike. We certainly think that they are done hiking for this cycle."
Nevertheless, Hogan believes Fed Chair Powell may try to thread the needle during his appearance at Spelman College in Atlanta Friday by walking back some of the week's more dovish commentary.
"We suspect that Chair Powell will repeat his 'we aren't even thinking about rate cuts right now' comment on Friday, to walk back some of the more dovish Fed speak from early this week," he said. "That seems much more likely than the FOMC raising rates again in December."
CFRA chief investment strategist Stovall also expects that Powell will take a more conservative stance on the subject of rate cuts than some of his colleagues.
Not More Hawkish, But Consistent
"Not more hawkish, but consistently hawkish. The Fed wants to remind us that they are data dependent and won't succumb to the desires of the market to cut rates too soon," Stovall told IBD. "They will wait for the data to tell them when it will be time to cut rates."
And he also believes the Fed Chair Powell-led central bank will cut rates in 2024, but will likely wait until Q3 to ensure "the embers of inflation are full extinguished."
"We think the Fed is finished raising rates in this cycle, which has eased upward pressure on the 10-year yield," he said. "We see the 10-year yield challenging the 200-day moving average in the low 4% area before proceeding in its secular rise."
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