Powell to Walk it Back?

Macro Perspectives

The S&P 500 traded just below the June lows yesterday. The U.S. 10-year yield traded just shy of 4%.

These two markets are global benchmarks for stocks and interest rates and, importantly, proxies for global economic health, stability, and risk appetite. With that, I would say we are at a pivotal moment.

Elsewhere, bond and currency markets in Europe may already be in a currency and sovereign debt crisis.

Again, this is all triggered by the Fed (the defacto global interest rate setter) by:

1. Ignoring the obvious (and intentional) inflationary formula in the pandemic response, and then ignoring the subsequent evidence of that inflation last year.

2. They finally acknowledged the inflation problem while continuing to fuel it through zero rates and QE, up to the point they flipped the switch—and only after six months of crawling rates higher, did they reach a somewhat historically normal level for interest rates to address near record levels of inflation.

With that, the Fed Chair is on the calendar again today for a prepared speech (a pre-recorded speech) for a community banking conference. Will he try to calm markets by walking back on the aggressive rate path that is being priced into markets?

We had a couple of Fed speakers yesterday, so that may have opened the door to some softening of the tone. Both Kashkari and Evans said rates are now "tight" or "restrictive," which is where they say they want to be. Kashkari admitted there is a "risk of overdoing it," and Evans admitted he's nervous about the pace of hikes.

We will see if Powell has something to add.

What else could play into this pivotal moment for global markets? Yesterday we woke to the news that the Nord Stream 2 pipeline, developed to carry Russian natural gas to Germany, leaked into the Baltic Sea. This could be a global war flashpoint, as fingers are being pointed in a lot of directions (most consequentially, at the U.S.), claiming an attack.

What would come after a full-blown World War? Among many things, a lot more government spending and an economic boom.