Rates: Welcome to the Powell Put

Rates: Welcome to the Powell Put

The Fed changed direction; a deluge of new data showed a solid but slightly soft employment market in January; OPEC started the year with a display of discipline; Italy slid into recession.


“When we see a sustained change in financial conditions, that's something that has to play into our thinking.”
Fed Chair Jerome Powell

Fed: Welcome to the Powell Put

To the relief of financial markets, the Fed took pains to retreat from its hawkish position late last year. The FOMC’s Jan 30 statement and post-meeting remarks departed from December’s stance, with no mention of gradual rate hikes, the addition of the word “patient” in describing its approach, and more. Dodging a question on whether the Fed’s latest no-hike rate decision was an end to the tightening regime, Powell noted “We’re going to know in hindsight”.

The reaction in fixed-income markets was immediate. Yields on 10-year Treasuries dropped nearly 11 basis points (bps) to as low as 2.622% on January 31, the day following the Fed decision. The 2-year fell nearly 13 bps to as low as 2.455%, and the 30-year, fell less (6.8 bps to as low as 2.536%) reflecting the longer-term outlook. Yield curve steepness (the spread between 3-month and 10-year Treasuries), moved away slightly from its flattish recessionary level, falling 9.1 bps to as low as 27.1 bps.

For more on the state of the economy, explore the latest from ClearBridge on Anatomy of a Recession.
 

U.S. jobs: Still solid

The numbers were solid all around, with the impact of the January partial federal government shutdown largely absent due to survey methodology. The unemployment rate came in at 4.0%, slightly above expectations; private payrolls rose 296k, better than expected. However, December’s figure saw a downward revision of 90k.  Labor participation rose slightly due to an increase in job seekers, some of whom might have been furloughed Federal workers; that’s also one explanation for the sharp rise in the underemployment rate, to 8.1% from December’s 7.6%; there was an atypically high 500k workers joining the category.  One bright note: prime working age 25-54 employment rate came in at 82.6%, highest since 2010.  One downbeat note: wages disappointed, slowing to a 0.1% gain, below expectations.
 

OPEC: Showing discipline

January was the kickoff of OPEC’s new production agreement; figures suggest an 80% compliance rate. Output fell by some 930k barrels (bbl) per day to 31.02 million bbl/day. Of the 11 members committing to the agreement, excluding Iran, Libya and Venezuela, compliance with the agreed-to production levels was some 79%, according to Bloomberg. with Saudi Arabia cutting 450mm bbl/day, one third more than required, to 10.2 million. That’s a big number; Saudi Arabia produced 11.1 million bbl/day in November.
 

Italy: It’s official

Italy’s economy shrank by 0.2% in Q4 2018, its second consecutive fall, and now meets the standard definition of an economic recession. That’s not a surprise, given the overall slowdown in Europe’s growth as global trade has weakened. Overall Eurozone growth picked up slightly in Q4, but Germany’s Q3 contraction has rippled through Europe’s economy, due to its high exposure to manufacturing and exports.  Germany’s figures for Q4 were not available as of Friday, Feb 1.

 


All data Source: Bloomberg, as of February 1, 2019, 11:00 AM.

Definitions:

The Federal Open Market Committee (FOMC) is a policy-making body of the Federal Reserve System (Fed), responsible for the formulation of a policy designed to promote economic growth, full employment, stable prices, and a sustainable pattern of international trade and payments.

basis point is one one-hundredth (1/100, or 0.01) of one percent.

 

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