Markets mixed as Powell provides neutral update on Fed outlook

Interest rate update

Federal Reserve Chair Jerome Powell provided some new messaging on the Fed’s policy outlook last week, acknowledging that there has been a “lack of further progress” in bringing down inflation this year. The speech was largely in line with minutes from the recent FOMC meeting, where Fed officials expressed concern with the persistence in inflation while also reaffirming that further hikes were unlikely. Powell did specifically note the Fed is prepared to “maintain the current level of restriction for as long as needed,” which likely strengthens the market’s perception that rate cuts are not in the immediate future.

Treasuries climbed in response to the speech, while the S&P dipped before eventually recovering on the day. Overall, the forward curve has risen by 20-30 basis points compared to a month ago, with the change most pronounced in the 1–2-year timeframe. For companies with floating-rate debt, the rise is obviously not good news, and the lack of imminent rate cuts likely means interest expense will remain elevated for a while. It’s difficult to forecast whether the current trend will continue, but for corporates looking to protect their margins against any further rises in interest rates, interest rate swaps are worth considering.

Macroeconomic health

While high inflation readings and recent Fed messaging introduced some risk-off sentiment in markets, the continued health of the job market and U.S. economy at large continues to impress in the face of tighter monetary policy. The International Monetary Fund’s April 2024 outlook forecasted U.S. gross domestic product at 2.70% annually, which is significantly faster than other Group of Seven economies. Initial jobless claims also came in at 212,000 on Thursday, a healthy number that was in line with expectations. The combined strength of the U.S. outlook and resultant hawkish monetary policy has continued to elevate the U.S. dollar above its historical levels, though its strength is similar to this time last year.

Oil falls as Israel-Iran tensions cool

Oil prices declined by about 3.00% over last week, with day-to-day movements largely driven by the latest news out of Israel. Iran had launched an unexpected missile attack on Israel more than a week ago, and there were some fears among market participants that Israel’s response would lead to a more full-scale escalation. But those fears cooled during the week, and though Israel counterattacked on Friday, the move was interpreted as less severe than some worried. WTI futures for May increased by less than a percentage point in response to the news, finishing the week around $83 per barrel.

The week ahead

There are several macroeconomic indicators on the docket for this week, including durable goods orders, first-quarter GDP, and pending home sales. We’ll also get the latest PCE reading on Friday, which will likely impact rates if it misses expectations.