“We are navigating by the stars on a cloudy night.” – Fed Chairman Jerome Powell at Jackson Hole. Wow! Normally when the Fed isn’t quite sure of how things are going to break, they tell us they are “Data Dependent”. The Chairman’s line on Friday seemed to me at least that the Fed, and the other major central banks really have little idea what comes next. With that in mind the resounding message was high for longer with a chance to be higher and then high for longer. The Fed is going to err on the side of caution with regards to inflation flaring up. As we closed on Friday, Fed Funds futures and OIS swaps implied about a 21% chance of an additional rate hike at the Fed’s next FOMC meeting, September 20-21. The long end of the rates curve was relatively well-behaved for the week while the front-end sold off with the 2-year now solidly above 5%. Equities gyrated for the week with the NASDAQ leading the pack, fueled by Nvidia’s strong earnings and general AI-mania.
We start the week this morning with Treasury yields treading water while equities are up small. On the global economic front, the weekend reads were full of concern over China’s slowdown and its effects on global growth. For the U.S. and Europe, a little Chinese economic head cold (although some are calling for worse) might be a good development in the fight against inflation. For emerging markets however, slowing Chinese growth will be painful. As we head into the last week of summer, we have an action-packed week full of important data releases and a barrage of Fed-Speak. On Tuesday we get the closely watched JOLT data, ADP and the first revision for second quarter GDP growth Wednesday, PCE Thursday and August Non-Farm Payroll Friday morning. Also, this week we have a Treasury refunding with $45 billion 2-years and $46 billion 5-year notes today and then $36 billion 7-year notes tomorrow.
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