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.


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.



IMPORTANT INFORMATION: All investments involve risk, including loss of principal. Past performance is no guarantee of future results. An investor cannot invest directly in an index. Unmanaged index returns do not reflect any fees, expenses or sales charges.

Equity securities are subject to price fluctuation and possible loss of principal. Fixed-income securities involve interest rate, credit, inflation and reinvestment risks; and possible loss of principal. As interest rates rise, the value of fixed income securities falls. International investments are subject to special risks including currency fluctuations, social, economic and political uncertainties, which could increase volatility. These risks are magnified in emerging markets.

The opinions and views expressed herein are not intended to be relied upon as a prediction or forecast of actual future events or performance, guarantee of future results, recommendations or advice.  Statements made in this material are not intended as buy or sell recommendations of any securities. Forward-looking statements are subject to uncertainties that could cause actual developments and results to differ materially from the expectations expressed. This information has been prepared from sources believed reliable but the accuracy and completeness of the information cannot be guaranteed. Information and opinions expressed by either Legg Mason or its affiliates are current as at the date indicated, are subject to change without notice, and do not  take into account the particular investment objectives, financial situation or needs of individual investors.

Forecasts are inherently limited and should not be relied upon as indicators of actual or future performance.

U.S. Treasuries are direct debt obligations issued and backed by the "full faith and credit" of the U.S. government. The U.S. government guarantees the principal and interest payments on U.S. Treasuries when the securities are held to maturity. Unlike U.S. Treasury securities, debt securities issued by the federal agencies and instrumentalities and related investments may or may not be backed by the full faith and credit of the U.S. government. Even when the U.S. government guarantees principal and interest payments on securities, this guarantee does not apply to losses resulting from declines in the market value of these securities.