Stocks and Mortgage Bonds are both sharply higher after Fed Chair Powell’s speech at Jackson Hole.
We heard from Fed Chair Jerome Powell today, and while there are still some data points ahead of the next Fed meeting, he made a clear case that he is ready to cut September 17. It looks like he gave the green light.
Powell Speech at Jackson Hole
Powell said that the slowdown in job growth was much larger than previously believed just a month ago…clearly giving a nod to the big revisions we saw in the latest report.
He also said that the downside risks to employment are rising, and if those risks materialize, they can do so quickly in the form of sharply higher layoffs and rising unemployment.
On inflation and tariffs: He believes that a reasonable base case is that the effects will be relatively short lived and a one-time shift in the price level. He explained that does not mean all at once, but he too is thinking that price increases from the tariffs should be one time.
Powell said that growth has slowed notably, about half of where it was, at 1.2% over first two quarters.
His bottom line was, “With policy in restrictive territory, the baseline outlook and the shifting balance of risks may warrant adjusting our policy stance.”
Clearly, this shows that he is in favor of cutting rates 25bp on September 17, and the market is perceiving it that way too, with odds of a cut up to 90%.
The one caveat that could derail things is the economic data that we will be getting ahead of the meeting. There is a PCE report at the end of the month, and another CPI report next month. Even if inflation rises, it’s expected, so as long as it’s not crazy high, it should not cause the Fed to shift gears. The Jobs Report on September 5 will likely be the biggest data point. If it’s another weak report, it solidifies the cut. But if it’s really strong, it could bring into question if the Fed will cut or not. Something that could help, and help the odds of a cut even if there is a strong Jobs Report, is the QCEW Benchmark Revision data for Q4 of last year that will be released on September 9. The fourth quarter showed very strong job growth, and we will likely see some sizable revisions.
As you know, Fed Governor Lisa Cook has been accused of mortgage fraud. President Trump announced today that he will fire Cook if she doesn’t resign. If this comes to be, then there would be another appointee by Trump since it is a governor’s position, which would likely be more dovish and in favor of a rate cut, especially since Lisa Cook was a vehement hawk.
Technical Analysis
Mortgage Bonds are in rally mode and have broken back above the 101.76 level. Bonds are moving towards the next ceiling at 102.09 and have more room to run.
The 10-year has broken back beneath 4.29% and has more room to improve until reaching 4.20%. Clearly, the long end of the market is responding well to Powell’s nod to a rate cut in September.
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