On guard for a potentially hawkish-sounding Fed Chair
The stock market is acting a bit antsy in front of the 1:30 p.m. ET speech from Fed Chair Powell on the economy, inflation, and the labor market. That's because it is concerned that the Fed Chair will arrest any rebound-minded pursuits with a hawkish-sounding speech.
Specifically, there are worries that he will say inflation, while improved, is still far too high, that the labor market, while softening, is still strong, and that the overall economy, supported by consumer spending, is still showing good resilience in the face of macro issues that include the Russia-Ukraine war, China's zero-COVID policy and, well, elevated inflation rates.
The main concern is that he will say the Fed has more work to do, that the Fed's terminal rate is apt to be higher than previously thought, and that once the terminal rate is reached the Fed will hold there for a good while to ensure inflation is under control.
In other words, market participants think the Fed Chair might squash the recovery effort that began in mid-October so that there isn't an undue easing of financial conditions that would make the Fed's inflation-fighting efforts more challenging.
That thinking inevitably invites views of higher rates for longer that, in turn, fuel worries about the Fed overdoing it and driving a hard landing for the U.S. economy. That concern is arguably on display today with market rates headed higher and the dollar moving up despite a softer-than-expected ADP Employment Change Report for November, a dour-looking Chicago PMI for November, and the fifth straight monthly decline in the Pending Home Sales Index. There was an upward revision to Q3 GDP (to 2.9% from 2.6%) and the GDP Price Deflator (to 4.3% from 4.1%), but that is backward-looking data.
The 2-yr note yield is up eight basis points to 4.55% and the 10-yr note yield is up three basis points to 3.78%. The U.S. Dollar Index is up 0.3% to 107.09.
Some of the stock market's weaker areas today are the more economically-sensitive financial (-1.2%), real estate (-0.6%), industrials (-0.6%), and materials (-0.5%) sectors. Growth stocks, meanwhile, are outperforming value stocks.
Everything is subject to change after Fed Chair Powell's speech, but for now, the stock and bond markets, and the dollar, have their guard up for a more hawkish-sounding speech.
The Nasdaq Composite is up 0.2%; the S&P 500 is down 0.2%; the Russell 2000 is down 0.4%; and the Dow Jones Industrial Average is down 0.5%.
