Good Thursday AM,

Boy, was yesterday a tough day in the markets. Federal Reserve Chair Jerome Powell endorsed an interest rate hike in March and made it clear that policy makers would act as needed to cool the hottest inflation in 40 years. The central bank will start to shrink its balance sheet after rate increases begin. Traders seized on Powell’s comments in the press conference about the current economic expansion being very different to the one the last time the bank tightened, and are now pricing in five rate hikes this year. As the Treasury market moved to price in more aggressive tightening, stock traders reacted to the message that the Fed may be less concerned with financial markets. Powell’s comments yesterday that the U.S. labor markets conditions are consistent with maximum employment means that the central bank is firmly focused on reigning in inflation. Traders will therefore become more focused on any data in that sphere, with this morning’s core PCE number for the fourth quarter giving an almost immediate check on inflation conditions. 

Today though, the market has taken back about half of what Powell snatched from our hands yesterday. The exact moment where he went off script, the markets tanked. The question from a reporter was whether or not he was confident that the job market was strong enough to withstand rate increases. His answer should have been a simple ‘yes, we like what we see in the labor markets.’ But no, he went way too far and said that the labor market is likely the strongest ever and could withstand multiple rate increases. This was not enough for him though. He went on to say a few times that we should expect a less accommodating Fed going forward. I guess if we can say anything positive about Powell’s remarks, they did prepare the market for a very strong GDP, which we did indeed get 6.9 vs 5.5 expected. Typically that GDP number would have sparked a selloff in bonds. The good GDP number however was offset by a weak durable orders number. Keep in mind that the GDP read was for the fourth quarter and Durable orders was just for last month, which gives it a bit more weight from a timing perspective. If you did not lock, hopefully this bounce will continue. Looking back at the last 12 months, the majority of the time (over 70%) bonds bounce back in the days following the Fed sell offs.

Please remain safe and healthy, make today great.