Morning Notes — More Dovish

Powell’s overall tone is more dovish than expected. Consensus was looking for his comments to be at least as hawkish as his post-meeting press conference on November 2. The most hawkish aspect of that press conference was Powell saying the cycle ceiling would need to be ‘a lot higher’ than the last dot plot.  Today, he described the cycle ceiling as only being ‘somewhat higher’ than the last dot plot.  The last updated dot plot came at the September meeting with an implied ceiling of 4.6%. Powell also sounded slightly more hopeful about seeing evidence of slowing inflation and job creation. The bond market is currently priced for a 5% ceiling (terminal rate), which now has a chance to drift lower if Friday’s Jobs Report and the December 13 CPI print miss expectations.  The S&P 500 has had a strong negative correlation with terminal rate expectations since mid-April.

SPX: Our call for a Q4 rally remains in place as long as the S&P 500 (SPX) stays north of 3900.  We see the 4100-4200 range capping the rally unless there’s a change in macro fundamentals – specifically lower terminal rates. And terminal rates may need to trend below 4.75% for the SPX to sustain closing levels above ~4200. Consensus for Friday’s Jobs Report is looking for non-farm payrolls of +200,000. Payroll gains below ~100,000 could take terminal rates close to 4.75%, and it will likely require another 50bp deceleration in YoY headline CPI (12/13) to push terminal rates below 4.75%.