Last week saw perhaps a change in sentiment from the “Goldilocks” economic and rate scenario that has been driving risk assets the last few months. As bond yields, especially longer duration borrowings continued to rachet higher the sharp slowdown in the world’s second largest economy, China, has moved front and center to give stocks a nice one-two punch. Real Treasury yields (TIPs) are now the highest they have been in twenty-one years with 30-year real yields solidly over 2%. One economist called this price action, “Price discovery in a post-QE world.” Economic reports such as retail sales and industrial production, as well as the Federal Reserve Bank of Atlanta 3rd Quarter updated GDP projection of 5.8% continue to point to an economy that is withstanding historic monetary restrictiveness.
We start the week this morning with Treasury yields continuing to head higher while equities are getting a bid of a bounce. It is Jackson Hole time! The best and the brightest will gather at the Fed’s annual symposium high in the Tetons to solve all our problems. Last year Fed Chairman Jerome Powell finally got his message in order with a blunt statement that he was going to “Keep at it until the job is done.” This year the Chairman speaks on Friday under the title “Economic Outlook”. I expect the main message from Mr. Powell to be that progress has been made on the inflation front but there’s still a lot more to do, mainly by keeping policy rates higher for longer and continuing balance sheet runoff or Quantitative Tightening. Most probably the Chairman will highlight the strength of our domestic economy and that a “soft landing” remains possible.
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