My 2 cents why Powell more "dovish" than Street expects post-jobs blowout

THIS IS AN INTRADAY WORD FOR MEMBERS OF FS INSIGHT ONLY

Fed Chair Powell speaks today at the Economic Club of DC at 12pm ET. And investors are cautious in front of his appearance, as many expect Powell to come out “hawkish” relative to his dovish Feb FOMC presser last week. The rationale being the strong Jan jobs report signals renewed concerns the Fed has to do more, not less. This is evidenced in the fact that Fed fund futures are now pricing in 5.1% by June 2023, compared to 4.8% or so just last week.

Our contrarian take is the Fed will actually stick to the more “dovish” message. While the Street believes this has very low (like zero) probability, here is our reasoning:

  • Fed risks credibility if the message swings 180 degrees from an official meeting just 7 days earlier. This is the opposite of predictable and understandable
  • It took the Fed 3 great inflation reports (below expectations) before Fed acknowledged “disinflation” — so will one strong jobs report cause Fed to suddenly want to accelerate hikes?
  • There are many problems with this Jan jobs report, including the fact that much of jobs dynamics in Jan is a function of how “seasonal layoffs” playout. That is, several economists note that if hiring is muted in Dec, Jan can see fewer layoffs. But this “seasonally adjusted” shows up as strong jobs. That is not reality.
  • Moreover, wage growth remains muted and while it seemed to jump in Jan, does this fit with the reality of companies reporting layoffs, and weak topline and even non-JOLTS showing a soft jobs market? So the Fed cannot even be certain that Jan labor markets really strengthened.
  • Several non-voting Fed members talked about how strong Jan jobs justified raising rates faster. Recall, Kashkari is the Fed member who in late December said “there was no signs of progress on inflation.” Sorry, the Fed members have a growing reputation of looking “backwards” at data (recall the December SEP issues).
  • Finally, investors are positioned cautiously into this Powell appearance. The Nasdaq is down 3% in the past 2 days. S&P 500 down 2% in the same timeframe.
  • Mark Newton, our Head of Technical Strategy, believes the S&P 500 possibly made its short-term low yesterday and is set to rally to 4,200 or higher in the coming weeks.
  • This is a contrarian take but is consistent with the fact that Powell could be dovish.

Bottom line, our take is Powell is probably more dovish than consensus expects.

We publish on a 3-day a week schedule:

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