Yields Surge on Eve of Powell Speech

Rates rise ahead of Powell speech. Treasury yields and swap rates rose dramatically today as markets continued to digest Friday’s strong payrolls report. As a result, Fed Funds futures now price in only a modest pullback in rates by the end of 2023, a significant change from the 0.50% in rate cuts previously priced in. Fed Chair Jerome Powell’s public comments tomorrow suddenly carry significant weight, particularly after his dovish comments following the Fed’s 0.25% rate hike last week. The 2-year Treasury yield rose 18 basis points on the day, bringing it back near 4.50%, while the 10-year Treasury yield rose 11bps to 3.64%.

Inflation markets readjust to robust U.S. labor data. Breakevens rose again today, bringing 2-year expected inflation figures to a 2-month high at 2.44%, well off the recent lows established in early January. However, long-term measures of expected inflation have remained constrained, indicating that the market does not see current labor market strength leading to runaway inflation.

Day ahead. Fed Chairman Jerome Powell will give a speech at 12:40 PM, with fellow Fed voter Michael Barr set to follow at 2 PM. Balance of trade data will lead the day at 8:30 AM, where the trade deficit is expected to widen to -$68.5 billion from -$61.5 billion last month.