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Markets Rally on Mixed Fed Messaging

Markets are preparing to build on yesterday’s rally with further gains in today’s session. Equity futures are setting up for a stronger open, Treasury yields are lower across the curve, and commodity prices are up. The dollar is lower against all of its major counterparts.

Media commentary yesterday suggested markets moved higher on dovish messaging from the Atlanta Fed’s (non voting) Raphael Bostic during a panel discussion hosted by the National Association for Business Economics – but we’re struggling to see evidence of a clear shift in positioning. Bostic did seem to anchor terminal rate expectations lower than market-implied levels would suggest, saying “I don’t think we’ll need to go a lot above 5 percent”, but the balance of his comments leaned quite hawkish. “I am very open to both,” he said in response to a question on whether he supported a 25- or 50-basis point rate hike at the next meeting, saying “The labor market has been stronger than I expected. Inflation has been more persistent than I expected”. He said “Slow and steady is going to be the appropriate course of action,” before warning that rates would need to remain elevated for a while, saying “We will just stay there and let that policy posture hold for an extended period of time. We’re going to really let the restrictiveness hold.”

In a prepared speech published later in the day, voting Governor Christopher Waller also sounded relatively hawkish, saying “I would be very pleased if the data we receive on inflation and the labor market this month show signs of moderation, which would suggest that the February data releases were just a bump in the road and that progress is continuing. But wishful thinking is not a substitute for hard evidence, in the form of economic data. After seeing promising signs of progress, we cannot risk a revival of inflation. Policymakers must remain data dependent, so my view will depend on what the data say”.

Two services indices today will round out what has been a quiet week on the North American data calendar: S&P’s purchasing manager survey is expected to hold at 50.5 for February, unchanged from the initial reading. The Institute for Supply Management’s equivalent is expected to inch toward 54.3 in February from 55.2 in the prior month. Evidence of stronger-than-expected demand in the all-important services sector could lift rate expectations and push the dollar higher.

Fed speakers include Dallas’s Lorie Logan, Bostic, governor Michelle Bowman, and Richmond’s Thomas Barkin.

Over the next week, the Reserve Bank of Australia, Bank of Canada, and Bank of Japan will deliver rate decisions, Canada will publish its latest job numbers, and the US will release its latest job opening and labour turnover survey, along with the release that shook global markets last month: the non-farm payrolls report. Whatever happens, it won’t be boring.

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