A television broadcasts Jerome Powell, chairman of the U.S. Federal Reserve, announcing an increase in the Federal Reserve interest rate on the floor of the New York Stock Exchange (NYSE) in New York. (Photographer: Michael Nagle/Bloomberg)

U.S. Bond Yields Pull Off Lows as Fed Embarks on Listening Tour

(Bloomberg) -- Strong data and soothing words pulled markets out of a tailspin Friday, and Federal Reserve Chairman Jerome Powell and his colleagues have plenty of chances next week to bring traders closer to policy makers’ viewpoint on interest rates.

Surprisingly robust U.S. labor figures on Friday helped close some of the gap between investors and the Fed’s projections, which imply two rate hikes in 2019. But rates markets still see the next policy move as a cut, possibly within the year, after weeks of sinking share prices shattered investor confidence.

If the Fed wants to prepare traders for another hike as soon as March, officials may conduct the flurry of speaking engagements scheduled for the days ahead as a listening tour. They’d be riffing off Powell’s comment Friday that he’s “listening sensitively to the message that markets are sending.” Stocks and Treasury yields surged as investors took that to mean the Fed won’t tighten to the point that it quashes economic growth.

U.S. Bond Yields Pull Off Lows as Fed Embarks on Listening Tour

“The bottom line for me was that financial conditions are going to be a key driver for Fed policy,” Kathy Jones, chief fixed-income strategist at Charles Schwab, said after Powell’s interview at the American Economic Association’s annual meeting in Atlanta.

As of Friday, stocks were on the upswing, with the S&P 500 climbing 3.3 percent. Two-year Treasury yields soared almost 12 basis points to 2.49 percent -- the largest increase since 2015. Ten-year yields rose a similar amount to 2.67 percent, climbing from the lowest since January 2018.

Looking Forward

The issues most likely to alleviate or exacerbate market strains next week may not be on the calendar. If doubts about American growth have eased for now, the market is still contending with China’s weakening economy, the potential blow-back on corporate earnings from trade wars, and the impasse over the partially shuttered U.S. government.

“These are all the forward-looking things that the market is trying to grapple with,” Jones said.

George Goncalves at Nomura sees two possible avenues for yields to extend their lift-off in the coming week.

One is supply, as the government sells a combined $78 billion of notes and bonds, and Nomura expects corporate issuance to rev up. Another would be if equities manage to build on their gains: If stocks have troughed, then yields may have too.

“Rates are just now a yin-yang of the equity market,” said Goncalves, head of Americas fixed-income strategy. “We got to extreme levels, and it’s all because everyone saw what happened to the equity markets in December.”

Equities also took comfort from Powell’s comments on the Fed’s willingness to adjust the pace of balance-sheet unwind as needed, Goncalves said. Markets may welcome any confirmation of that flexibility in the Jan. 9 release of minutes from the Fed’s December meeting.

What to Watch

  • Market watchers will monitor developments in Washington for signs of a deal as the partial government shutdown enters its third week
  • They’ll also be watching trade talks between the U.S. and China set for Monday and Tuesday
  • The week brings a wave of Fedspeak, with Powell appearing again
  • Shutdown permitting, the schedule of economic indicators includes the following:
    • Jan. 7: Factory orders/durables; ISM services
    • Jan. 8: NFIB small-business optimism; trade balance; JOLTS job openings; consumer credit
    • Jan. 9: MBA mortgage applications
    • Jan. 10: Initial jobless claims; Bloomberg consumer comfort
    • Jan. 11: Consumer price index; monthly budget statement
  • Fedspeak:
    • Jan. 5: New York Fed’s John Williams, Atlanta Fed’s Raphael Bostic and San Francisco Fed’s Mary Daly appear at AEA meeting
    • Jan. 7: Bostic speaks in Atlanta
    • Jan. 9: Bostic in Chattanooga on economic outlook; Chicago Fed President Charles Evans on economy and monetary policy; Boston Fed’s Eric Rosengren on economic outlook; FOMC minutes released at 2 p.m. Washington
    • Jan. 10: Richmond Fed President Thomas Barkin on ensuring long-term growth; Powell addresses The Economic Club of Washington; St Louis Fed’s James Bullard on economy and monetary policy; Evans on economy, monetary policy; Fed Vice Chairman Richard Clarida in New York
  • Auctions:
    • Jan. 7: $39 billion of 3-month bills, $36 billion of 6-month bills
    • Jan. 8: $38 billion of 3-year notes
    • Jan. 9: $24 billion reopening of 10-year notes
    • Jan. 10: 4- and 8-week bills; $16 billion reopening of 30-year bonds

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