Yields Crash After Powell Delivers Hope of Fed Slowdown

Rates fall dramatically on Powell commentary. Bonds rallied significantly throughout the afternoon following Jerome Powell’s 1:30 PM speech, reversing the selloff that occurred earlier in the day. Yields opened the day higher after GDP growth rate and employment change data revealed a mixed Q3 economy. However, both the 2-year and 10-year yields experienced a 20+ bp swing from their morning highs, finishing the session down ~16 and ~14 bps, respectively. Equities realized massive boosts after expectations for the Fed’s terminal rate decreased, the S&P climbing 3.09% and NASDAQ rising 4.41% on the day.

Powell nods to December hike slowdown and higher terminal rate outlook. In his widely anticipated speech today, Chair Powell said that moderating the pace of rate hikes may come “as soon as the December meeting.” In line with the results of the last FOMC meeting, he also reiterated that rates may need to go higher than expected, another clue about the updated Fed economic projections to be released in December. In his assessment of inflation he pointed out that despite tighter policy and slowing growth, he has not seen clear progress on slowing inflation which he said remains “far too high.” He also pointed out that down months in inflation data have often been followed by renewed increases, and that it will take a lot more than 1-month’s reading to show that inflation is declining. Ahead of labor releases this week, he highlighted the important relationship between labor and core PCE inflation, since wages are a key driver of spending categories that constitute about 50% of the measure. Investors reacted to the speech by betting that rates will peak next year slightly below 5%, compared to slightly above 5% prior. 

Day ahead. Fed members Lorie Logan (hawkish non-voter), Michelle Bowman (hawkish voter), and Michael Barr (neutral voter) are set to make public comments tomorrow morning. Personal spending and income data for the month of October will be released at 8:30 AM ET, which will be followed by PMI data for November at 10 AM ET.