The market really took Federal Reserve Chair Jerome Powell’s words at face value on Tuesday.
Short-term yields rose, and the stock market slumped, with this comment: recent data suggest “the ultimate level of interest rates is likely to be higher than previously anticipated,” Powell said.
Ahead of Friday’s nonfarm payrolls report and Tuesday’s CPI release, he said “if the totality of the data were to indicate that faster tightening is warranted, we would be prepared to increase the pace of rate hikes.” So the question is just how much a deceleration in jobs growth, and CPI, is needed to prevent the Fed from going back to 50 basis point moves in two weeks’ time.
Given the market is now pricing in a 71% chance of a half point hike, an investor can infer that Powell & Co. will probably need to see something tamer than the consensus expectations of a 208,000 increase in payrolls and a 0.3% rise in CPI for February to stick with quarter-point increases.
The interest-rate forecast from French bank BNP Paribas, in its newly published second-quarter outlook, appears consistent with Powell’s hawkish tone: the Treasury dealer added two more quarter-point rate hikes to its 2023 view, to take the terminal rate view to between 5.5% and 5.75%, which is above the current dot plot between 5% and 5.25%. Also like Powell, the bank used the word “bumpy” to describe the path for inflation.
“This has been our long-held conviction: the prolonged period of high inflation will leave a mark on the mindset of consumers and businesses, delaying the disinflationary process or, at the very least, making it more bumpy,” it said.
By the second quarter, the BNP team says the 2-year Treasury yield TMUBMUSD02Y, 5.019% will reach 5.25% and the 10-year TMUBMUSD10Y, 3.947% will get to 4.3%. That doesn’t sound like a great environment for stocks, and BNP doesn’t think so, either, with a year-end target of 3,400 on the S&P 500 SPX, -1.53%.
“We have been surprised by equity markets’ YTD resilience, but outside Europe few drivers have changed meaningfully, in our view. Growth data have improved, but mostly from the labor market, we note, which points to margin compression and, of course, sticky inflation. U.S. earnings momentum remains negative,” it says.
While the Bank of Japan and other central banks has boosted the liquidity environment, with quantitative tightening under way, this tailwind will fade. “In short, the recent rally has left valuations even more stretched than before: [the S&P 500 equity risk premium] is now at two-decade lows,” it says.
The bank says investors should avoid growth stocks in the U.S., while it likes banks in both Europe and Japan. One interesting element of the BNP Paribas outlook that seems at odds with both weaker stocks and bonds is its view that the dollar will weaken later in 2023, though it concedes there are “two-sided risks in the near term.”
NQ00, +0.02% inched higher after the 575-point slide in the Dow industrials DJIA, -1.72% on Tuesday. The yield on the 10-year Treasury TMUBMUSD10Y, 3.947% was on the precipice of reclaiming the 4% mark.
It’s day two of Jerome Powell on Capitol Hill, with the Fed chair’s appearance before the House Financial Services Committee starting at 10 a.m.
The ADP private-sector employment report said 242,000 jobs were added in February; perhaps more notable is that ADP second estimate for January payrolls growth was 119,000, up from its original estimate but still well below the 443,000 reported by the U.S. government.
Also on the economic docket: data on job openings, and in the afternoon, the Beige Book.
Cybersecurity software company CrowdStrike CRWD, -2.08% guided for better results than Wall Street estimated, and its outlook for revenue growth and EBITDA margin make it a “Rule of 60” company again, according to analysts at DA Davidson.
The Federal Trade Commission is questioning whether Twitter can protect customer records, as Elon Musk apologized to a fired worker for comments he made on the platform while saying the company may become cash flow positive by the second quarter.
Yes, layoffs have spiked in the technology sector, but they’re still very low everywhere else. Steve Englander, head of North American macro strategy, put together this chart showing the layoffs outside of tech — the figure in green — are still at healthy levels. Englander expects payrolls growth of 150,000 in February.
Random reads
An alligator taken from a Texas zoo as an egg has been returned, 20 years later.
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Powell’s comments slammed markets. Here’s what one bank sees for stocks, bonds.
The market really took Federal Reserve Chair Jerome Powell’s words at face value on Tuesday.
Short-term yields rose, and the stock market slumped, with this comment: recent data suggest “the ultimate level of interest rates is likely to be higher than previously anticipated,” Powell said.
Ahead of Friday’s nonfarm payrolls report and Tuesday’s CPI release, he said “if the totality of the data were to indicate that faster tightening is warranted, we would be prepared to increase the pace of rate hikes.” So the question is just how much a deceleration in jobs growth, and CPI, is needed to prevent the Fed from going back to 50 basis point moves in two weeks’ time.
Given the market is now pricing in a 71% chance of a half point hike, an investor can infer that Powell & Co. will probably need to see something tamer than the consensus expectations of a 208,000 increase in payrolls and a 0.3% rise in CPI for February to stick with quarter-point increases.
The interest-rate forecast from French bank BNP Paribas, in its newly published second-quarter outlook, appears consistent with Powell’s hawkish tone: the Treasury dealer added two more quarter-point rate hikes to its 2023 view, to take the terminal rate view to between 5.5% and 5.75%, which is above the current dot plot between 5% and 5.25%. Also like Powell, the bank used the word “bumpy” to describe the path for inflation.
“This has been our long-held conviction: the prolonged period of high inflation will leave a mark on the mindset of consumers and businesses, delaying the disinflationary process or, at the very least, making it more bumpy,” it said.
By the second quarter, the BNP team says the 2-year Treasury yield
5.019%
3.947%
-1.53% .
TMUBMUSD02Y,
will reach 5.25% and the 10-year
TMUBMUSD10Y,
will get to 4.3%. That doesn’t sound like a great environment for stocks, and BNP doesn’t think so, either, with a year-end target of 3,400 on the S&P 500
SPX,
“We have been surprised by equity markets’ YTD resilience, but outside Europe few drivers have changed meaningfully, in our view. Growth data have improved, but mostly from the labor market, we note, which points to margin compression and, of course, sticky inflation. U.S. earnings momentum remains negative,” it says.
While the Bank of Japan and other central banks has boosted the liquidity environment, with quantitative tightening under way, this tailwind will fade. “In short, the recent rally has left valuations even more stretched than before: [the S&P 500 equity risk premium] is now at two-decade lows,” it says.
The bank says investors should avoid growth stocks in the U.S., while it likes banks in both Europe and Japan. One interesting element of the BNP Paribas outlook that seems at odds with both weaker stocks and bonds is its view that the dollar will weaken later in 2023, though it concedes there are “two-sided risks in the near term.”
The markets
U.S. stock futures
-0.01%
ES00,
NQ00,
+0.02%
-1.72%
3.947%
inched higher after the 575-point slide in the Dow industrials
DJIA,
on Tuesday. The yield on the 10-year Treasury
TMUBMUSD10Y,
was on the precipice of reclaiming the 4% mark.
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The buzz
It’s day two of Jerome Powell on Capitol Hill, with the Fed chair’s appearance before the House Financial Services Committee starting at 10 a.m.
The ADP private-sector employment report said 242,000 jobs were added in February; perhaps more notable is that ADP second estimate for January payrolls growth was 119,000, up from its original estimate but still well below the 443,000 reported by the U.S. government.
Also on the economic docket: data on job openings, and in the afternoon, the Beige Book.
Citadel founder Ken Griffin says the Fed rate hikes are like surgery with a dull knife.
Warren Buffett’s Berkshire Hathaway
-1.85%
-1.35% .
BRK.B,
boosted its stake in Occidental Petroleum
OXY,
Cybersecurity software company CrowdStrike
-2.08%
CRWD,
guided for better results than Wall Street estimated, and its outlook for revenue growth and EBITDA margin make it a “Rule of 60” company again, according to analysts at DA Davidson.
Silvergate Capital shares
-3.70%
SI,
rose in premarket trade after Bloomberg reported the bank held talks with Federal Deposit Insurance Corp. officials on how to avoid a shutdown.
The Federal Trade Commission is questioning whether Twitter can protect customer records, as Elon Musk apologized to a fired worker for comments he made on the platform while saying the company may become cash flow positive by the second quarter.
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The chart
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Yes, layoffs have spiked in the technology sector, but they’re still very low everywhere else. Steve Englander, head of North American macro strategy, put together this chart showing the layoffs outside of tech — the figure in green — are still at healthy levels. Englander expects payrolls growth of 150,000 in February.
Random reads
An alligator taken from a Texas zoo as an egg has been returned, 20 years later.
It’s all smiles, as archaeologists have come across a mini-sphinx with a grin.
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Source: https://www.marketwatch.com/story/powells-rate-view-came-as-no-surprise-to-this-treasury-dealer-heres-what-it-says-is-next-for-stocks-and-bonds-b7f9d399?siteid=yhoof2&yptr=yahoo