All Eyes and Ears on D.C.

New York City and Wall Street may be the financial capital of the world, but it is Washington D.C. that is the de facto financial capital of the world today. That’s because Fed Chair Powell is having a “Conversation with David Rubinstein” at the Economic Club of Washington, D.C., at 12:40 p.m. ET, and President Biden is delivering his State of the Union Address before Congress and the American people at 9:00 p.m. ET.

Both will be talking points for the capital markets, yet whatever Mr. Powell says will likely be the only component with any true market-moving impact. We say that respectfully knowing that a divided Congress is going to make it nearly impossible to pass any major piece of legislation that might incorporate something like a quadrupling of the tax rate on corporate buybacks, which is a proposal the president will be advancing tonight.

The capital markets are laser-focused on Fed policy and they have grown a little anxious the past few sessions about the Fed possibly raising rates more than expected and keeping them higher for longer.

That concern has been an offshoot of the much stronger than expected January employment report, which has sent Treasury yields higher, the dollar higher, and has seen the prospect of a third, 25-basis point rate hike at the May FOMC meeting priced into the fed funds futures market.

Accordingly, market participants are anxious to hear if Fed Chair Powell will sound more hawkish than he did at his press conference on February 1 following the FOMC meeting.

We heard earlier from Minneapolis Fed President Kashkari (FOMC voter) on CNBC, who said he doesn’t think the Fed has made enough progress bringing down inflation and reaffirmed his fed funds rate target of 5.40%. That perspective followed on the heels of Atlanta Fed President Bostic (not an FOMC voter) who, according to Bloomberg, said late in yesterday’s session that the January employment data could bring a higher interest rate peak back on the table.

So, the reticence in the futures market this morning has a good bit to do with an anxious wait-and-see mentality in front of Fed Chair Powell’s comments. We would add, in related central bank news, that the Reserve Bank of Australia raised its cash rate by 25 basis points to 3.35%, as expected, and noted that additional increases will be needed in coming months.

Currently, the S&P 500 futures are down eight points and are trading 0.2% below fair value, the Nasdaq 100 futures are down eight points and are trading roughly in-line with fair value, and the Dow Jones Industrial Average futures are down 111 points and are trading 0.3% below fair value.

The 2-yr note yield, meanwhile, is down one basis point at 4.45% (having stood at 4.10% last Thursday) and the 10-yr note yield is up three basis points to 3.66% (having stood at 3.40% last Thursday). The U.S. Dollar Index is up 0.2% to 103.85 (having stood at 101.75 last Thursday).

There has been another rush of earnings reporting and, once again, the aggregate news and guidance can be deemed mixed at best. Then again, that is a Wall Street matter and that is not where the market’s mind is at this particular moment.

Separately, the December trade deficit widened to $67.4 billion (Briefing.com consensus -$68.5 billion) from an upwardly revised $61.0 billion (from -$61.5 billion) in November with exports $2.2 billion less than November exports and imports $4.2 billion more than November imports.

The key takeaway from the report is that it reflected a slowdown in global trade, evidenced by a $2.1 billion decline in the three-month moving average for the goods and services deficit to $68.6 billion that resulted from a $2.6 billion decrease in average exports and a $4.7 billion decrease in average imports.

This report was released by the Census Bureau, which is located in Washington, D.C. — the financial capital of the world (today anyway).

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Originally Posted February 7, 2023 – All eyes and ears on D.C.