Powell’s Hawkish Testimony Moves Markets

2s10s spread inverts below -1% for first time since 1981. Swap rates and Treasury yields rose across a flattening curve today, which sent the 2s10ssspread to -1.04%, the most significant inversion we have seen in nearly a half century. Powell’s hawkish comments today were the main force behind the 2-year yield’s 12bp surge, which sent the yield above 5.00%. Conversely, the 10-year yield rose only 1bp, where it now sits at 3.96%. Elsewhere, equities suffered on the hawkish sentiment, the S&P and NASDAQ indices falling 1.53% and 1.25%, respectively.

Hawkish Powell sees higher peak rate. Fed Chair Powell said the Fed will probably increase rates faster and higher than previously expected given persistent inflation. He said, “the latest economic data have come in stronger than expected, which suggests the ultimate level of interest rates is likely to be higher than previously anticipated.” In a shift from prior weeks, where markets largely expected a 25bp hike in March, traders are now pricing in a 50bp hike and expect a 5.6% peak this year, up from 5.5% yesterday. In December, Fed officials estimated a peak rate of 5.1%, but Powell was clear that those forecasts will likely increase in the updated March projections.

Day ahead. Fed Chair Jerome Powell’s testimony will continue at 10 AM ET. Data will be plentiful in the morning as well, with mortgage, employment change, and JOLTs job opening releases on the schedule.