Powell's Dovish Remarks Were A Plus, But There's Still More To Come

After bottoming out to new lows several times between October and November, 10-year treasury note and 30-year treasury bond futures have jumped to months-long highs on the run-up to the final meeting of the Federal Open Market Committee. In the closing days of November, one-month contracts on 10-year notes are currently up about 1.5 percent and testing old levels at $119 while 30-year futures are up more than 2 percent from recent lows, bumping against $140.

The upcoming interest rate decision—which will come Dec. 19— will serve as a big signal for both the Fed’s conviction for continued economic growth as well as the equity market’s resilience to yet another hike.

Chairman Jerome Powell’s Wednesday speech to the Economic Club of New York was hardly as hawkish as some had expected. While he didn’t comment directly on which way the Fed is leaning as far as December’s meeting is concerned, market watchers zeroed in on his comment that rates “remain just below the broad range of estimates of the level that would be neutral for the economy.”

That “just below” phrasing seemed to indicate that the Fed is nearly done raising rates for the time being. Currently, the fed funds futures are pricing in an 83 percent chance of a December hike and one more in 2019. He also noted that the economy is close to both maximum employment and price stability, assuaging some lingering concerns from October’s volatility.

The equities market liked what they heard, as S&P futures had their best day since Nov. 7. In the bond market, 10-year treasury note futures regained their overnight losses while 30-year treasury note futures hit a two-week low.

If the body does decide to stick with its initial annual forecast and raises rates to 2.25-2.5 percent, 2018 will mark a milestone in the recovery from the 2008 financial collapse. With previous hikes in March, June, and September, one more rate hike this year would put 2018’s rate of increases on par with 2006, the last year the Fed increased rates prior to the crash.

This week’s comments were soothing, but we’re by no means out of the woods yet. All eyes will be on Powell again next Wednesday as he testifies in front of Congress. And we’ve got the Fed’s grand 2018 finale the following week.

One way or the other, the next two weeks will be a big test for the market and investors, one that will likely set the tone for early 2019.