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Market Snapshot 5.18.22- The Fed & Inflation

Good Wednesday AM, the best day of the week,

So where do we begin? I guess with yesterday’s Fed Chairman Powell’s Q&A at the WSJ Future of Everything symposium. Mr. Powell is convicted to bringing down inflation. Federal Reserve Chairman Jerome Powell said the central bank’s resolve in combating the highest inflation in 40 years shouldn’t be questioned, even if it requires pushing up unemployment. “Restoring price stability is an unconditional need. It is something we have to do,” Mr. Powell said in an interview Tuesday during The Wall Street Journal’s Future of Everything Festival. “There could be some pain involved.”

Mr. Powell said he hoped that the Fed could bring down inflation while preserving a strong labor market, which he said might lead the unemployment rate—near half-century lows of 3.6% in April—to rise slightly. “It may not be a perfect labor market,” he said. Just when I was starting to feel good about rates and less volatility, Mr. Powell’s comments lead to a huge sell sign in bonds yesterday afternoon. The 10-yr rose .1% to 2.99 and mortgage bonds lost 60bps. Today though, is a new day.

Today’s news was more bond friendly than not, but it was not good for housing with a big miss on housing starts and building permits. In addition both Walmart and Target reported dismal earnings and stocks are on sale. Each index is down more than 3% and well, there goes the Bear market bounce (yes, I see this as a Bear market). Bonds are holding their own with the 10-yr note yield dropping to 2.91%. Mortgage bonds prices are also doing ok (but still way off from yesterday am).

Ever see the movie Sicario? Federal investigators found a more than 1,700-foot-long drug-smuggling tunnel connecting San Diego to Tijuana, Mexico. Authorities charged six people with conspiracy to distribute more than 1,750 pounds of cocaine and seized 3.5 pounds of heroin and 164 pounds of methamphetamine… I didn’t know this was a real thing, tunnels between countries.

Here is a good piece from Bloomberg on the Fed and inflation. The economy is clearly showing signs of slowing.

Yesterday Fed Chairman offered up some unambiguously hawkish rhetoric, saying that the Fed was prepared to hike until there was “clear and convincing” evidence that inflation was starting to roll over. He said the Fed was willing to go past neutral in order to accomplish that, and he acknowledged that doing so may not be painless, as it may involve inducing a rise in the unemployment rate, which is to say layoffs. On this note, it may be worth paying attention a bit more to what we’re already seeing in the labor market. We know just based on news reports, that tech companies are cutting back on hiring. And some startups have announced layoffs. Even some larger ones (like Netflix, reportedly) are trimming workers. And in fact, we’ve seen weekly Initial Jobless Claims drift up since the middle of March.

We’re still seeing a robust pace of hiring. The BLS reported a 428,000 increase in employment in April. Still, it’s time to start watching that weekly claims number a little more closely. Slowing inflation through the employment channel is a key way the Fed operates. That number is already ticking up. We’ll see how far up it can go.

Please remain safe and healthy, make today great.