Fed Raises Rates +25 bp; The Safety System Works

We had a market two-fer this week: first, Powell Press Conference Wednesday, followed two days later by Payrolls Friday.

First, Powell Wednesday. The Fed raised rates by the expected 25 basis points (bp) (+0.25%). I reduce an hour of press conference down to five bullet points:

• We need substantially more evidence that inflation is on a downward path.
• Ongoing [rate] increases will be appropriate.
• Core services inflation ex-housing is still inflationary.
• We will stay the course until the job is done.
• Yes, the pandemic is over.

For some reason, the market liked all this – gold/silver/S&P 500 (SPX) all rallied, and the dollar fell, as did crude. It was all risk-on. At least on Wednesday, anyway.

Here is the end-of-week interest rate chart. Note the short-term rate clusters (1m, 3m, 6m, 1Y) ended the week around 4.75%, which says that the market is betting on just one more 25 bp rate increase this year, and probably not at the next meeting. Maybe three months from now, give or take? That’s how I read the tea leaves. This, while the 10-year is more than a full point (~120 bp) below the cluster, so the “rate increases” are projected to be temporary. Transitory, I’ve heard it called. That’s what current prices are projecting.

And then – Payrolls Friday, released at 08:30 Eastern.

• Headline: +517k [+0.33% month over month (m/m)], expected +185k, prior +223k.
• Part Time/Economic/Slack Work: +37k.
• 16-64, Civ Labor Force (working/looking for work), With a Disability: +26k.

The market appeared shocked by the surprisingly strong headline number, and most instruments sold off hard in response. Gold and silver fell off a cliff, and never recovered. SPX dropped, rallied strongly back, and then dropped a second time, closing near the lows. Friday was an ugly day except for the buck, which rose 1.18 [+1.16%]. Grandpa’s Teleprompter took credit for the “fantastic economy,” which to my mind largely depends on the ongoing mysterious services labor shortage, which has the Fed all verklempt about pausing rate increases. (Verklempt: SNL circa 1993). Discuss amongst yourselves.

To be fair, I think the WEF/Biden-Handlers do deserve credit for the services worker shortages, but when normal Americans figure out the root cause of this shortage, I predict they will not be so pleased.