Morning Notes — Terminal Rate Expectations

Terminal rate expectations may come down as job market softens. Anecdotal evidence of a softer jobs market continues to build, especially in Tech where large daily layoff announcements are now common. Official government statistics operate with significant lag and these announcements are unlikely to be reflected in tomorrow’s BLS Jobs Report. Fed policy is primarily based on official government data and the effects of its aggressive 12-month tightening campaign also operate with a significant lag. Takeaways from yesterday’s release of Fed minutes suggest that easing financial conditions in the current environment may result in a more aggressive tightening campaign, The term ‘financial conditions’ mostly refers to pricing in currency, fixed income and equity markets. Recall tat financial conditions only recently eased after the November CPI signaled disinflation. A hawkish policy response amid disinflationary data will only increase risk for a policy mistake and further erode Fed credibility.

Hawkish Fed policy amid a deteriorating economic backdrop puts equity markets in a tactically bearish window that will eventually close. Macro fundamental conditions are challenging at the moment, but it won’t last forever. The Fed will likely remain hawkish until something breaks and then quickly pivot like it did in January 2019 when Fed chair Powell last targeted easing financial conditions.