Now It’s Jay Powell’s Turn to Speak
Federal Reserve chairman Jay Powell’s speaking engagement on March 4 is, in Horizon’s view, critical for the central bank’s messaging and credibility, and for taming the bond market selloff.
The problem Powell needs to deal with head on is this: some people in the bond market think economic growth will be fast enough, and inflation high enough, to prompt the Fed to tighten policy much earlier than they say they will. The lurch higher in short-term rate expectations – and the dynamics that are driving it – is posing a credibility issue that Powell needs to address.
That lack of belief in the Fed’s low-rate promise is clear when looking at how many rate increases are now priced in for 2023 (3 hikes) and 2024 (5 hikes) using eurodollar contracts – despite the Fed’s current pledge to keep rates pinned to zero until at least the end of 2023.
Behind the Curve
The challenge for Powell is to convince markets that the Fed will not wait so long to address inflation that it will be in a panic to catch up. The recent selloff in fixed-income markets signaled that change in market opinion, as shown in the chart below. Up until mid-February, inflation was expected to increase, but real – or inflation adjusted – yields were tumbling, meaning traders saw no danger to asset prices. However, in the middle of last month, markets became concerned the Fed might rush to raise rates in the face of strong inflation, as shown by the jump in real yields. The prospect of a Fed falling behind the curve is why the specter of another $1.9 trillion in economic stimulus may have set off alarm bells among some on Wall Street. It certainly didn’t help that some famous economists warned of just such a scenario.
From Buyer’s Strike to Buying Frenzy?
The stage is set for there to be fireworks in markets during Powell’s appearance. But it all rests on how firmly he pushes back against the doubters.
A forceful Powell defense Thursday could bring in yield-starved investors off the sidelines, and perhaps a buying spree. From Horizon’s vantage point, there was a buyer’s strike in bonds last week. The clearest example is the terrible demand at the auction of 7-year Treasury notes – which caused 10-year Treasury yields to briefly spike to 1.6%.
If Powell should falter, markets may quickly send bond yields higher and tighten financial conditions, damaging the Fed’s aim to keep monetary policy as loose as possible to foster a recovery. Such a scenario also suggests that it would be even more difficult for the Fed to squash the sceptics.
In Horizon’s view, now is the time for Powell to be bold as he takes on Wall Street’s bond bears and attempts to restore calm to global markets. If not, he risks a disorderly adjustment in prices as investors race to update their portfolios to reflect the possibility of higher interest rates much sooner than anyone expected.
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Emerging Markets Are Surging – And Evolving: Market Notes
Inflation Could Be Coming, Are You Ready?
Disappearing Junk Bond Yields
Do Bonds Really Offset Stock Market Declines?
If Inflation Returns, Bond’s Diversification Power May Disappear
Essentially Nothing. That’s How Much Bonds May Return Over Next Five Years
Only Two Words Matter to Markets: Stimulus Spending
PIIGS Fly and Other Stories of Investors Reaching for Risky Bets
Momentum’s No Longer the Stock Market King, Vaccine Will Raise New Leadership
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7.9 Trillion Reasons Not to Fight the Fed, ECB, BOJ or BOE
This commentary is written by Horizon Investments’ asset management team. For additional commentary and media interviews, contact Chief Investment Officer Scott Ladner at 704-919-3602 or sladner@horizoninvestments.com.
To download a copy of this commentary and the chart of the week, click the button below.
To discuss how we can empower you please contact us at 866.371.2399 ext. 202 or info@horizoninvestments.com.
Nothing contained herein should be construed as an offer to sell or the solicitation of an offer to buy any security. This report does not attempt to examine all the facts and circumstances that may be relevant to any company, industry or security mentioned herein. We are not soliciting any action based on this document. It is for the general information of clients of Horizon Investments, LLC (“Horizon”). This document does not constitute a personal recommendation or take into account the particular investment objectives, financial situations, or needs of individual clients. Before acting on any analysis, advice or recommendation in this document, clients should consider whether the security in question is suitable for their particular circumstances and, if necessary, seek professional advice. Investors may realize losses on any investments. It is not possible to invest directly in an index.
Past performance is not a guide to future performance. Future returns are not guaranteed, and a loss of original capital may occur. This commentary is based on public information that we consider reliable, but we do not represent that it is accurate or complete, and it should not be relied on as such. Opinions expressed herein are our opinions as of the date of this document. These opinions may not be reflected in all of our strategies. We do not intend to and will not endeavor to update the information discussed in this document. No part of this document may be (i) copied, photocopied, or duplicated in any form by any means or (ii) redistributed without Horizon’s prior written consent.
Other disclosure information is available at www.horizoninvestments.com.
Horizon Investments and the Horizon H are registered trademarks of Horizon Investments, LLC
©2021 Horizon Investments LLC
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Fed’s Powell Battles Wall Street’s Bond Bears
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Now It’s Jay Powell’s Turn to Speak
Federal Reserve chairman Jay Powell’s speaking engagement on March 4 is, in Horizon’s view, critical for the central bank’s messaging and credibility, and for taming the bond market selloff.
The problem Powell needs to deal with head on is this: some people in the bond market think economic growth will be fast enough, and inflation high enough, to prompt the Fed to tighten policy much earlier than they say they will. The lurch higher in short-term rate expectations – and the dynamics that are driving it – is posing a credibility issue that Powell needs to address.
That lack of belief in the Fed’s low-rate promise is clear when looking at how many rate increases are now priced in for 2023 (3 hikes) and 2024 (5 hikes) using eurodollar contracts – despite the Fed’s current pledge to keep rates pinned to zero until at least the end of 2023.
Behind the Curve
The challenge for Powell is to convince markets that the Fed will not wait so long to address inflation that it will be in a panic to catch up. The recent selloff in fixed-income markets signaled that change in market opinion, as shown in the chart below. Up until mid-February, inflation was expected to increase, but real – or inflation adjusted – yields were tumbling, meaning traders saw no danger to asset prices. However, in the middle of last month, markets became concerned the Fed might rush to raise rates in the face of strong inflation, as shown by the jump in real yields. The prospect of a Fed falling behind the curve is why the specter of another $1.9 trillion in economic stimulus may have set off alarm bells among some on Wall Street. It certainly didn’t help that some famous economists warned of just such a scenario.
From Buyer’s Strike to Buying Frenzy?
The stage is set for there to be fireworks in markets during Powell’s appearance. But it all rests on how firmly he pushes back against the doubters.
A forceful Powell defense Thursday could bring in yield-starved investors off the sidelines, and perhaps a buying spree. From Horizon’s vantage point, there was a buyer’s strike in bonds last week. The clearest example is the terrible demand at the auction of 7-year Treasury notes – which caused 10-year Treasury yields to briefly spike to 1.6%.
If Powell should falter, markets may quickly send bond yields higher and tighten financial conditions, damaging the Fed’s aim to keep monetary policy as loose as possible to foster a recovery. Such a scenario also suggests that it would be even more difficult for the Fed to squash the sceptics.
In Horizon’s view, now is the time for Powell to be bold as he takes on Wall Street’s bond bears and attempts to restore calm to global markets. If not, he risks a disorderly adjustment in prices as investors race to update their portfolios to reflect the possibility of higher interest rates much sooner than anyone expected.
Related stories:
You May Need a Bigger Down Payment for a New Home: Big Number
Emerging Markets Are Surging – And Evolving: Market Notes
Inflation Could Be Coming, Are You Ready?
Disappearing Junk Bond Yields
Do Bonds Really Offset Stock Market Declines?
If Inflation Returns, Bond’s Diversification Power May Disappear
Essentially Nothing. That’s How Much Bonds May Return Over Next Five Years
Only Two Words Matter to Markets: Stimulus Spending
PIIGS Fly and Other Stories of Investors Reaching for Risky Bets
Momentum’s No Longer the Stock Market King, Vaccine Will Raise New Leadership
It’s Getting Harder to Fund Retirement Using Bonds
7.9 Trillion Reasons Not to Fight the Fed, ECB, BOJ or BOE
This commentary is written by Horizon Investments’ asset management team. For additional commentary and media interviews, contact Chief Investment Officer Scott Ladner at 704-919-3602 or sladner@horizoninvestments.com.
To download a copy of this commentary and the chart of the week, click the button below.
To discuss how we can empower you please contact us at 866.371.2399 ext. 202 or info@horizoninvestments.com.
Nothing contained herein should be construed as an offer to sell or the solicitation of an offer to buy any security. This report does not attempt to examine all the facts and circumstances that may be relevant to any company, industry or security mentioned herein. We are not soliciting any action based on this document. It is for the general information of clients of Horizon Investments, LLC (“Horizon”). This document does not constitute a personal recommendation or take into account the particular investment objectives, financial situations, or needs of individual clients. Before acting on any analysis, advice or recommendation in this document, clients should consider whether the security in question is suitable for their particular circumstances and, if necessary, seek professional advice. Investors may realize losses on any investments. It is not possible to invest directly in an index.
Past performance is not a guide to future performance. Future returns are not guaranteed, and a loss of original capital may occur. This commentary is based on public information that we consider reliable, but we do not represent that it is accurate or complete, and it should not be relied on as such. Opinions expressed herein are our opinions as of the date of this document. These opinions may not be reflected in all of our strategies. We do not intend to and will not endeavor to update the information discussed in this document. No part of this document may be (i) copied, photocopied, or duplicated in any form by any means or (ii) redistributed without Horizon’s prior written consent.
Other disclosure information is available at www.horizoninvestments.com.
Horizon Investments and the Horizon H are registered trademarks of Horizon Investments, LLC
©2021 Horizon Investments LLC
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