Mixed Up in Front of Powell Speech

There is a good bit of news in today’s morning mix, but the news that will matter most to the market won’t come to light until 1:30 p.m. ET. That’s when Fed Chair Powell will give a speech at the Brookings Institution entitled Economic Outlook, Inflation, and the Labor Market.

Inquiry minds want to know not only what Mr. Powell is thinking, but how he says what he is thinking about each of those elements. Will he adopt a more hawkish-minded tone like he did after the last FOMC meeting or will he have a less hawkish tone?

That is the question, and the answer to it will move markets this afternoon, because his tone is going to move the market’s thinking with respect to the path of monetary policy.

Currently, the futures market isn’t being moved much. The S&P 500 futures are down two points and are trading roughly in-line with fair value, the Nasdaq 100 futures are unchanged and are trading fractionally above fair value, and the Dow Jones Industrial Average futures are down 26 points and are trading 0.1% below fair value.

It is a predominately mixed disposition, which is due partly to a wait-and-see mindset in front of Mr. Powell’s speech and partly to a stream of mixed news items. To wit:

• The lockdown in Zhengzhou (where the iPhone is produced) has been lifted, but new protests over China’s zero-COVID approach have taken root in Guangzhou.
• CrowdStrike (CRWD) is down 17.6% after coming up shy of total net new ARR expectations for Q3 and Workday (WDAY) is up 9.6% after topping Q3 expectations and raising its FY23 subscription revenue guidance.
• The ADP Employment Change Report for November was weaker than expected (127,000 vs Briefing.com consensus of 200,000) and the Second Estimate for Q3 GDP was stronger than expected (2.9% vs Briefing.com consensus of 2.7%).
• The November CPI reading for the eurozone was cooler than expected at 10.0% yr/yr and down from 10.6% in October, which is good, yet China’s November Manufacturing PMI (48.0) and Non-Manufacturing PMI (46.7) were both weaker than expected, down from October, and deeper in contraction territory (i.e. sub-50), which is bad.
• Refinancing applications were down 13% week-over-week and purchase applications were up 4.0% week-over-week.

The futures market had been faring better. The softer-than-expected ADP reading had been helping some, having been interpreted as a potentially encouraging signal for the Fed. The stronger revision to Q3 GDP, however, took some steam out of the futures market.

Briefly, Q3 GDP was revised up to 2.9% from the advance estimate of 2.6%. The GDP Price Deflator was also revised up to 4.3% (Briefing.com consensus 4.1%) from the advance estimate of 4.1%.

The key takeaway from the report is that growth was better than expected and inflation was higher than first thought.

The reaction in the Treasury market captures this understanding.

The 2-yr note yield, at 4.47% shortly before the GDP release, is up six basis points to 4.47% and the 10-yr note yield, at 3.72% before the release, is up two basis points to 3.77%.

It is a peculiar reaction to backward-looking data, but with the Atlanta Fed GDPNow model estimating 4.3% real GDP growth for Q4, the market seems to be registering some angst about what it could mean for what it might hear later today from Fed Chair Powell.

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Originally Posted November 30, 2022 – Mixed up in front of Powell speech