Powell Validates the Moderate Pace Narrative

Wednesday’s Fed Chair Powell speech was good news for risky assets as he focused his message on moderating inflation and an economy that is still trending in a positive capacity despite mixed economic signals. Economic data that showed inflation is easing, the labor market is cooling, and manufacturing is slowing.

The core personal consumption expenditures index (PCE) of inflation grew 5% from a year ago, confirming the recent trend of falling price data points. The November manufacturing PMI registered 49 percent; 1.2 percentage points lower than the 50.2 percent recorded in October. Below 50 percent represents contractionary territory. As a result, the equity markets consolidated the gains yesterday as the S&P 500 flirts with the 200-day moving average.

Compared with the stock market, which had a spectacular intraday rally as Powell spoke, the Treasury market response was muted at best. Three-month yields went unchanged on the day and ten-year yields fell by only five basis points.

The severe inversion between the 3’s to 10’s suggests the risks of overtightening the many market participants have been expecting now matches the Powell’s statement that the time for moderating the pace of rate increases may come as soon as the December meeting.

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