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Traders React to Powell’s Jackson Hole Speech


Traders React to Powell’s Jackson Hole Speech

Investors have honed in on Federal Reserve Chairman Jerome Powell’s recent speech at Jackson Hole, with many focusing on the potential need for policymakers to address a reaccelerating U.S. economy.

Bullish Moves in Treasury Yields

Following Powell’s speech, the 2-year Treasury yield briefly reached 5.1%, on track to close at its highest level in 16-17 years. Additionally, the 5-year yield on Treasury inflation-protected securities rose to 2.259% within an hour after the speech, set to achieve its highest close since November 2008. As a result, the 5-year Treasury yield received a boost.

Market Outlook

These shifts in yields indicate that the market believes the Federal Reserve will continue raising interest rates and that the U.S. economy remains robust. The TIPS rate, which reflects economic performance when inflation is not a factor, is currently signaling strong prospects for the future.

According to the Atlanta Fed’s GDPNow model, real gross domestic product growth is forecasted to be 5.9% in the third quarter. Even if this number is halved, it still suggests that the economy is experiencing acceleration. In the first quarter, the U.S. economy grew at a solid pace of 2%, followed by a 2.4% pace in the second quarter.

Shift in Market Sentiment

Initially, investors entered Powell’s speech with a bullish outlook, causing stocks to rise and the dollar to weaken. However, once the speech concluded and Treasury yields climbed, stocks dropped and the dollar strengthened. Later in the day, equities regained momentum, with all three major indexes heading higher.

Overall, investors’ response to Powell’s speech reflects optimism about the strength of the U.S. economy and the potential for future actions by the Federal Reserve.

The Impact of Powell’s Remarks on Treasury Yields

The recent remarks made by Federal Reserve Chairman Jerome Powell have caused a rise in Treasury yields. Traders and investors have focused on the more hawkish aspects of his speech, leading to increased yields across different Treasury notes.

Higher Yields Across the Board

Yields of one- through 10-year Treasury notes have all seen an increase. Particularly, the two-year Treasury note has underperformed, with its corresponding yield rising by as much as 9.4 basis points. This surge in yields reflects the market’s reaction to Powell’s statements regarding potential future interest rate hikes.

Fed’s Stance on Interest Rates

Chairman Powell stated that policymakers are ready to further raise interest rates if necessary, especially if inflation remains high. Furthermore, he mentioned that careful evaluation of incoming data will guide their decisions. Powell emphasized that implementing restrictive policies will likely be necessary to bring inflation back down to the Fed’s target of 2%.

Concerns about Economic Activity and Inflation

Mike Sanders, head of fixed income at Madison Investments, expressed concerns about recent economic activity potentially contributing to higher inflation rates. He believes that the recent data pointing towards better-than-expected growth raises the likelihood of an additional interest rate hike.

Market Reaction

Following Powell’s remarks, the market-implied chances of a fed funds rate target increase in November or December have slightly risen. Traders have also been considering the long-term implications of Powell’s speech, which has led to higher 20- and 30-year Treasury yields.

Fed’s Focus on Inflation Fighting

BMO Wealth Management’s Chief Investment Officer, Yung-Yu Ma, noted that Chairman Powell’s speech conveyed a continued stance of “higher for longer.” While Powell acknowledged the need for caution, he presented two alternatives: tightening further or maintaining the status quo. The Fed views the risks as leaning towards the need to combat inflation.

In conclusion, Powell’s remarks have had a significant impact on Treasury yields, prompting increased expectations of interest rate hikes. Traders and investors will continue to monitor future economic data and the Fed’s actions closely in the coming months.

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