Powell’s Hawkish Testimony Drives Yields Higher

 

A More Hawkish Powell than Anticipated?

Federal Reserve Chairman Jerome Powell opened his Congressional testimony this morning with prepared remarks that were largely in-line with the expectations of market pundits, noting the FOMC’s goal to “strike a balance between avoiding an overheated economy and bringing PCE price inflation to 2% on a sustained basis.”  It wasn’t until the Q&A session with the House Financial Services Committee afterwards that financial markets began to respond to comments from the new Fed Chair.  More specifically, Powell explained that his “personal outlook for the economy has strengthened since December,” acknowledging that “some of the headwinds the U.S. economy faced in previous years have turned into tailwinds,” such as a more stimulative fiscal policy and increased foreign demand for US exports.  Investors perceived the comments as additional evidence in support of four rate hikes during 2018, compared to the three tightenings projected by the Fed in their final meeting of 2017.  Inflation and jobs data set to be released over the next two weeks may prove to be crucial in moving the needle on the FOMC’s “dots” projections set at the March meeting.

 

 

US Treasury prices gapped lower after Powell’s hawkish comments, with yields/swap rates climbing 3-7 bps across the curve, pushing the 10-year note yield near 2.90%.  Major stock indices did not respond well to the perceived shift in rate hike expectations, as the S&P 500 and Nasdaq fell roughly 1.25% while the DJIA trimmed 0.85% on the day.  The US dollar was one of the few beneficiaries during the trading session, climbing 0.6% against major currencies.  Alongside the rise in the dollar, crude oil futures experienced their largest daily decline in nearly three weeks, as WTI crude decreased 1.65% to $62.85/barrel.         

 

Mixed Bag of Business Spending, Inventory Data

There was no shortage of key economic data releases today, beginning with the Commerce Department’s report on US capital goods orders during January.  Headline durable goods orders declined a larger-than-expected 3.7% last month, weighed down by a steep 10% reduction in orders for transportation equipment.  Core capital goods orders (nondefense, excluding aircrafts) slipped 0.2% MoM (+0.5% expected), marking a second consecutive month of declines (-0.6% in December 2017).  Much of the pullback in business investment over the last two months has been attributed to uncertainty over the impact of the new tax laws – a trend that economists expect to reverse and rebound in the upcoming months.  Shipments of core capital goods similarly struggled, rising a marginal 0.1% on the month.

 

 

A separate report this morning provided the advance readings for retail and wholesale inventories during January.  Growth in wholesale inventories remained robust last month, rising to +0.7% MoM (vs +0.6% previous month), complemented by similarly strong increases in retail inventories, which came in at +0.8% MoM (vs +0.3% in December).  Motor vehicles accounted for the largest proportion of the build in retail inventories.

 

 

A third key economic data release included Commerce Department’s report on the US goods trade deficit.  Influenced by exports falling sharply by 2.2%, the trade gap widened to $74.4 billion during January ($71.3 billion deficit expected).  The number of imported goods also declined, but to a lesser extent than exports, down 0.5% for the month in reflection of decreased demand for imported consumer goods.