The Fed Chief speaks to lawmakers, and our portfolios

Stocks had a mixed close in an up-down day as traders, not investors, ran the show ahead of today’s testimony. Crude oil crept over $80 / barrel for the 3^rd time this year, reflecting ebbs and flows of supply.

Squawk talk. The Head Fed will head to Capitol Hill today to give lawmakers a chance to complain about inflation on behalf of their constituents. The most powerful banker in the world will sit calmly and allow them to grandstand. He may drop a nugget or two of information on the Fed’s rate path, but information will be so ambiguous that it will take much speculation to get some real solid direction.

We haven’t heard from Powell for about a month now. His last comments were on-brand for the current Fed regime. Inflation is still high, employment is still too solid, the economy is ok, rate hiking must continue, and rates will probably have to stay at or above these levels for longer… oh, and we are not giving up on that +2% target. His disciples, those other bankers, love to talk, and they have largely kept on-brand as well, although with slight nuances. They all seem to be settling on another +50 to +100 basis points of hikes before it is all over sometime later this year. The majority of them seem to be settling somewhere in the middle.

Let’s go over a brief timeline since the FOMC members actually wrote down their projections for rates last December 14^th. At that point, the bankers, on median, believed that Fed Funds would close out 2023 at 5.10%. For practical reasons, let’s just call that +50 basis points higher than where we are today. If we look at the dots, we can see that 2 of the FOMC members expected rates to be above 5.5%.

On November 10^th, the Consumer Price Index / CPI came in with a respectable decline from +8.2% to +7.7%. This was encouraging to investors as the CPI was at +9.1% just a few short months earlier. As the Fed was meeting on December 13^th, the CPI print for the prior month showed that inflation declined once again to +7.1%, beating economists’ estimates for a second straight month. When a day later, on December 14^th, the Fed raised rates by a smaller-than-recent +50 basis points, investors were positive given the recent data, and shrugged off the aggressive dot plot as it did not likely factor in the CPI print from a day earlier. Since then, we have had 2 more CPI releases of +6.5% and +6.4%, still declining but at a slower pace. The other gauge of inflation, PCE Deflator, actually gained from January to February.  At the end of 2022, Fed Funds futures were implying a 4.4% rate for the end of 2023. That is quite a discrepancy from the Fed’s own projection.

The labor market remained strong throughout that period, which played against the theory of a softer Fed. The Fed made it clear that the strong labor market was inflationary. On December 2^nd, new Nonfarm Payrolls for the prior month came in unexpectedly higher for an 8^th straight month at +263k with an upward revision of the prior release. Since the start of 2023, two prints would show a gain of +223k and +517k, both stronger than expected. It is clear that the labor market remains strong, counter to bullish market sentiment.

Since then, equities rallied through last month’s labor release, after which they gave back some gains for a loss in February. Futures, too, adjusted to the data. As of this morning, futures points to a +25 basis-point hike (almost the exact same probability as in December) later this month with a yearend rate of 5.34% and a peak of 5.46%. That is a long way from the 4.4% expected at the release of the last dot plot. Later this month we will get a new dot plot which will factor in the data that was released in the interim. What will it show? That is the BIGquestion that investors will hope to gain insight on from these two days of testimony. We still have 2 more data points yet to be released before the next FOMC meeting. This Friday’s employment situation and the CPI next week. The Fed is now very much data dependent, so there is not much that the Chairman can say about rates… unless he knows something we don’t. Let’s bend an ear and listen to his testimony.

WHAT’S SHAKIN’

Meta Platforms Inc (META) shares are higher by +1.30% after it announced that it would lay off thousands more employees this month, specifically in metaverse division. This comes on top of the already announced -13% reduction from last year. Potential average analyst target upside: +15.8%.

KeyCorp (KEY) shares are lower by -2.75% in the premarket after it lowered its full year net interest guidance significantly below what analysts were expecting. The company stated that the decline was due to soft loan demand. Dividend yield: 4.51%. Potential average analyst target upside: +9.4%.

YESTERDAY’S MARKETS

Stocks had a mixed close yesterday as traders followed technical ahead of today’s Powell testimony. The S&P500 closed higher by +0.07%, the Dow Jones Industrial Average gained +0.12%, the Nasdaq Composite Index slipped by -0.11%, and the Russell 2000 Index declined by -1.48%. Bonds declined and 10-year Treasury Note yields were unchanged at 3.95%. Cryptos declined by -0.40% and Bitcoin slipped by -0.34%.

NEXT UP

• Fed Chairman Jerome Powell will deliver testimony to the Senate Banking Committee. The testimony will commence at 10:00 AM Wall Street Time this morning. This will be a market mover. Tomorrow, he will be back on the Hill in front of the House Financial Services Committee.