The first thing we saw yesterday
Was ADP led to dismay
But Treasury news
Adjusted some views
And stocks started trading okay
 
However, t’were two things we learned
First NYCB stock was spurned
Now, you may recall
That their greatest haul
Was Signature Bank, which was burned
 
And lastly Chair Powell, at two
Explained what he’s likely to do
They’re not cutting rates
As both their mandates
Remain far ahead in their view
 
Just when you thought it was safe to go back in the water…
 
I am old enough to remember when there was a growing certainty that not only was the Fed virtually guaranteed to cut rates by the May meeting, but the March meeting was very much on the table.  After all, inflation was below their 2.0% target (if you look at the recent 6-month run rate anyway) and therefore they just had to cut rates or stock prices might fall!  Or something like that.  But somehow, Jay and the FOMC missed that memo.  Instead, what they told us was [my emphasis];
 
“The Committee seeks to achieve maximum employment and inflation at the rate of 2 percent over the longer run. The Committee judges that the risks to achieving its employment and inflation goals are moving into better balance. The economic outlook is uncertain, and the Committee remains highly attentive to inflation risks.
In support of its goals, the Committee decided to maintain the target range for the federal funds rate at 5-1/4 to 5-1/2 percent. In considering any adjustments to the target range for the federal funds rate, the Committee will carefully assess incoming data, the evolving outlook, and the balance of risks. The Committee does not expect it will be appropriate to reduce the target range until it has gained greater confidence that inflation is moving sustainably toward 2 percent. In addition, the Committee will continue reducing its holdings of Treasury securities and agency debt and agency mortgage-backed securities, as described in its previously announced plans. The Committee is strongly committed to returning inflation to its 2 percent objective.”
 
In other words, while it is highly unlikely that they will need to hike rates further, unlike the markets or the punditry, Powell has little confidence that they have won the inflation battle and rate cuts remain merely a distant prospect.  Certainly, there was no obvious concern that interest rates are “too” high at this time.  In other words, this was a much more hawkish statement, and Powell’s answers in the press conference were in exactly the same vein.  Memories of the dovish December meeting have faded from view.    And this was the denouement to quite a day, one which gave us so much new information.
 
Things started with a weaker than expected ADP Employment result, just 107K, although that data point’s correlation to NFP has been diminishing of late.  Regardless, it was the type of softness that got people primed for a dovish Fed.  Then, the QRA indicated that the Treasury will be issuing what appears to be about $45-$50 billion in new coupons this quarter to fund a $400 billion or $500 billion budget deficit.  The balance of that will be via T-bills which means that while the ratio is not as aggressively leaning toward T-bills as last quarter, it is still miles above the historical rate of 20% ish.  Those two stories got bond bulls hyped, although equity markets struggled on some weak earnings numbers. 
 
And then we heard from New York Community Bank (NYCB), which you may recall, was the lucky recipient of the Signature Bank assets last March.  Well, it turns out they made a hash of things, losing a bunch of money with some pretty bad loan impairments added on to increased capital requirements because they grew to a new, larger risk-weighting tier after the acquisition.  At this time, there is no indication they are about to go bust, but the question has been asked a lot as the stock cratered and investors ran into Treasury debt just to be safe.  As it happens, the stock, which had basically doubled over the past year after buying Signature, has reverted to its pre-acquisition price and that added jitters to everyone’s views.  PS, those loan impairments were CRE based which naturally leads to the question of what is going on with other regional banks.
 
Finally, during the press conference, Chairman Powell was clear that a March rate cut was highly unlikely and that was the final nail in the equity market’s coffin.  So, the NASDAQ led the way lower, falling -2.2% while the S&P 500 tumbled -1.6%.  At the same time, 10-year yields dropped like a stone, down 12bps to 3.91%.
 
Looking ahead, I wonder how all those folks who were certain the Fed HAD to cut because policy was just TOO TIGHT for their liking will reframe their narrative.  To my eye, yesterday’s equity declines are a blip and will not even register at the Eccles Building.  There is a bit of irony in that the doves need now eat so much crow.
 
Ok, on to this morning, where the overnight price action saw another mixed picture in Asia, but this time with Japan (Nikkei -0.75%) sliding while Chinese shares (Hang Seng +0.5%, CSI +0.1%) edging higher.  There was yet another announcement of a bit of further fiscal support from the Chinese government, but Xi remains reluctant to bring out the bazookas.  European shares are also mixed with gains in the UK and Spain and losses in France and Germany.  PMI data showed that the Flash numbers were pretty much spot on and all of Europe remains well below 50.0 except Norway (50.7) which benefits from its oil industry.  It remains very difficult to get excited about the Eurozone’s economic prospects these days which should ultimately weigh on the ECB to cut rates sooner and the euro to suffer in that case.  As to US futures, after a wipeout yesterday, this morning they are firmer by about 0.5% at this hour (6:45).
 
In the bond market, after yesterday’s Treasury yield collapse, 10-year yields are higher by 3bps this morning and European sovereigns have risen about 4bps on average.  This movement is more a response to the large move yesterday rather than a result of new information.  Overnight, JGB yields slipped 4bps, clearly following in the footsteps of Treasury yields. 
 
As to commodities, oil (+1.0%) has bounced after a weak session yesterday that was driven by demand worries.  But tensions in the Middle East seem to be reasserting themselves with several stories in the press this morning regarding the danger to the world from a potential collapse in shipping capabilities.  The ongoing Houthi attacks in the Red Sea are starting to really take their toll on supply chain situations.  This is not only bad for inflation readings but could well impair the ultimate delivery of critical things like oil, thus driving its price even higher.  As to the metals markets, they are all under pressure this morning with gold holding on best given its haven status but all the industrial metals lower by 1% or more.
 
Finally, the dollar is coming up roses this morning.  While in the early going yesterday, before the FOMC meeting, the dollar broadly sold off on the softer ADP and dovish QRA, Powell changed everything, and the dollar reversed course in the middle of the day and rallied back nicely.  This is true against virtually all its G10 and EMG counterparts.  The weakest members are AUD (-0.7%) after weak housing data Down Under added to thoughts of a rate cut coming soon.  As well, we see GBP (-0.4%) just ahead of the BOE meeting where expectations are for a more dovish statement although no policy change.  But we are seeing weakness in CLP (-1.3%) on the back of that weak copper price and weakness in ZAR (-0.4%) on the weak metals complex as well.  Given the hawkish tilt from Powell yesterday, unless there is a concerted effort by the Fed speakers that will be flooding the tape over the coming weeks to reverse that course, I suspect the dollar will benefit in the near-term.
 
On the data front, this morning brings Initial (exp 212K) and Continuing (1840K) Claims, Nonfarm Productivity (2.5%), Unit Labor Costs (1.6%) and ISM Manufacturing (47.0).  With NFP tomorrow, I expect that the productivity and ULC data should be of the most interest as they will play most deeply into the Fed’s thinking.  Improved productivity implies that there is less reason to cut interest rates as the “neutral rate” should be higher than previously thought.  In fact, that dynamic would be very positive for the dollar, and interestingly, for the equity market as well as it would be a clear boost to earnings potential.  We shall see how it turns out.
 
Good luck
Adf