This last week shows how data-dependent markets have become, especially with a highly anticipated Fed meeting approaching. Last Friday’s August jobs report showed a softening in labor demand. This suggested that the labor supply/demand pressures could be slightly easing. Treasuries rallied on Friday in hopes the Fed wouldn’t have to increase rates as much as previously thought. The jury is still out on where the Fed’s “terminal rate” will end up in early/mid-2023. However, Tuesday’s hotter than expected economic reports from the services sector spooked markets as inflationary. The 10 Year yield spiked over 15 basis points up to 3.36% a recent high. Then, today’s Fed Beige Book survey indicated slowing growth and less inflationary pressures. This spurred another rally in treasuries – down to 3.27%. Fed President Lael Brainerd’s comments today were generally hawkish as per the Fed’s recent united message. She used the phrase “for some time” as she gauged how long rates would need to be elevated. But she also provided some hope as she acknowledged the risks of keeping rates high for too long. She indicated that the aggressive stance could “create risks associated with overtightening.” Interestingly, she also implied that the rapid increase in prices over the last 18 months has inflated margins for sellers of goods. She noted that the price consumers pay for cars has risen much faster in the last year than the price dealers pay wholesale. This implies there may be some room for prices to drop in certain sectors. Futures markets are pricing a 75 bp increase in the September 20-21 meeting. Stay tuned….
By David R. Pascale, Jr. , Senior Vice President at George Smith Partners