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Powell’s Speech Commences at 10:00 AM

A rally in big tech fizzled as bond yields rose with all parsing remarks from a slew of Federal Reserve officials and awaiting today’s speech by FRB Chair Powell for clues on the outlook for interest rates.

After posting early morning gains, the NASDAQ fell about 2.0% as the glow of AI was no longer able to keep the index up. 

Powell’s speech commences at 10:00 AM and it is largely expected to be a nonevent however all are fearful of an unexpected pronouncement.

Many are now beginning to obsess as to whether there has been an increase in the neutral rate.  The neutral rate is the theoretical level at what rate neither stimulates nor restricts the economy. 

The Fed since 2019 had a 2.5% median estimate for this policy rate over the long run—essentially their gauge of neutral—down from 3.5% eight years ago.  Boosting it could intensify discussions about whether trend inflation rates are now higher and whether there should be a bigger premium to buy longer term Treasuries.

As indicated above “several” Federal Reserve officials spoke yesterday, indicating that policy makers may be close to being done with interest rate increases.  The market is fearful, however, that Powell may not rule out additional hikes until inflation is more clearly on a downward path.

Speaking of higher rates, mortgage rates have jumped to a 22 year high.  Freddie Mac said its average for a 30-year fixed loan was 7.23%, the highest since May 2001 and up from 7.09% last week.

Will longer dated Treasuries follow a similar path?  The 10- and 30-year Treasury is yielding around 4.30%.  Yields on both Treasury benchmarks are at significant discounts as compared to mortgages.  Historically the spread between mortgages and longer dated Treasury benchmarks is around 75 to 100 bps.  Either longer dated Treasuries must increase in yield or mortgage rates must decline to return to historical averages.

Last night the foreign markets were mixed. London was up 0.45%, Paris up 0.67% and Frankfurt up 0.45%.  China was down 0.52%, Japan 2.05% and Hang Seng down 1.40%.

Futures are flat but the direction of the market can change significantly based upon the interpretation of Powell’s remarks.  The 10-year is off 3/32 to yield 4.25%.

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Ken Engelke

Chief Economic Strategist Managing Director

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