MARKET UPDATE 2/27/18
New Federal Reserve Chair, Jerome Powell, is set to address Congress today at 10:00 am. Before his testimony, markets get to review his prepared remarks which were just released.
Here are some of the highlights from his prepared remarks:
- Powell says further gradual interest rate hikes will best promote the Fed’s inflation, employment objectives.
- Powell says Fed’s policy-setting committee views near-term risks to economic outlook as roughly balanced and will monitor inflation closely.
- Powell says financial conditions remain accommodative despite recent financial volatility.
- Powell says Fed does not see a recent tightening of financial conditions as weighing heavily on the outlook for the economy, jobs, and inflation.
- Powell says recent wage increases likely have been dumped by weak productivity growth; last year’s business investment growth should boost productivity
Markets initially took these remarks as hawkish and sent the 10 Year yield to 2.88%. Powell’s comments about further rate hikes solidify the Fed’s current rate hike path this year at 3 or more increases. Powell also sees the economy continuing to grow despite tightening conditions.
This is Powell’s first time addressing Congress on the Fed’s monetary policy. No one expects him to give the markets any surprises. Many economists said after reading his prepared remarks that he sounded very similar to Janet Yellen. So far its business as usual at the Fed and we should expect to see 3 rate hikes this year with the first hike just 2 weeks away at the Fed’s March meeting.
Helping rates this morning was the disappointing Durable Goods Orders report for January. After rising 2.6% in December, Durable Goods Orders for January fell -3.7%. Durable Goods Orders are a measure of manufacturing activity. These numbers tend to be volatile on a month to month basis but nonetheless, this is weaker than expected reading.
In housing market news, the 20-City Case Shiller Home Price Index showed a 0.6% rise in home prices in December. Most of the gains came from the Western region of the country. Overall, year-over-year prices are up 6.3%
There are still important data pieces to be released this week. Tomorrow GDP estimates for the 4th quarter are released at 8:30 am. Thursday, ISM Manufacturing Index and Personal Consumption Expenditures (PCE) reports are released. PCE is a preferred gauge of inflation for the Fed as it measures income/wages. Economists are expecting a month over month rise of 0.3%. If this number comes in much higher, expect bonds to sell-off.
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