Powell took a measured approach in his first speech as Fed chair as he gave reasons why the Fed shouldn’t hike too quickly and why the Fed shouldn’t hike too slowly. This is a slow hike cycle overall, but he means even slower when describing a speed which is too slow. Too slow could be construed as one hike per year.

He expects inflation to increase to the Fed’s 2% target. He noted how the economy was strong and how the labor market was strengthening, but not at full employment because wage growth hasn’t been heating up. He made the point I’ve been making which is that the slack in the labor market is being supported by workers coming back into the labor force. The latest futures pricing shows a higher chance of two hikes than four hikes. I remain in the camp that expects two or three hikes because the economy is weakening. I think the main reason expectations have become more dovish is because of the correction in stocks.

Stocks Fall

There was yet another wild day on Wall Street as stocks sold off because of the $100 billion in proposed tariffs by Trump on China. The S&P 500 was down 2.19% and the VIX was up 13.46% to 21.49. It’s tough to understand what Wall Street thinks of these tariffs because it ignored the Chinese tariffs on Wednesday, but followed through with the decline on Friday. Part of the reason for the decline might be that the market was up 3.14% in the prior three days. We are in a new era of increased oscillations in the market as it decides if it wants to stay in the range it has been in for two months or if it wants to try for a bear market. Earnings season can’t come soon enough because they might help stocks improve.

Bonds Rally

The 10 year yield had a steep decline as it fell almost 6 basis points to 2.77%. The 2 year yield fell about 4 basis points which means the curve steepened. The latest difference between the two is 51 basis points as the curve has been steady in the past few days. The forward curve for the 1 month overnight index swap has slightly inverted after the 2 year forward point. This implies rate cuts after Q1 2020. This supports my long term forecast that there will be a recession in either 2020 or 2021.

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