Change has been in the air since the November 10th CPI data. That single report did more than any other event to raise hopes for a big picture shift in 2022's rate narrative. Then 2 days ago, Fed Chair Powell confirmed the thoughts shared by other Fed speakers in the past few weeks. Specifically, the Fed is now at the point of slowing the pace of rate hikes and settling on a "terminal" (aka "ceiling") Fed Funds Rate--one that it will attempt to hold as long as possible. In order for the shifty narrative to play out, not only does inflation need to continue to moderate, but the labor market also needs to avoid sending stronger signals. Unfortunately for bonds, today's signals were anything but weak.
True to form, both sides of the market stuck to the familiar trading pattern that merely asks "what's this data mean for Fed policy?" We've referred to this in the past as the "Fed accommodation trade," but labels aren't important. The function is quite clear: stronger jobs data is bad for both stocks and bonds--at least as far as the initial reaction to the headlines are concerned.
How can we be sure of the implications for Fed policy? There's no way to unequivocally confirm it, but the market securities concerned with betting on the path of the Fed Funds Rate sure seem to be convinced.
And let's not forget Powell's comment from Wednesday:
FED'S POWELL: INITIAL SURGE OF INFLATION NOT RELATED TO WAGES, BUT WAGES ARE GOING TO BE IMPORTANT GOING FORWARD
along with the fact that wage growth came in at 0.6 vs 0.3 this morning and was revised up another 0.1 for last month.
Finally, let's not forget that today's weakness is a drop in the bucket in the big picture. In fact, it's downright hard to see the 4 pixels of red line representing today's selling in the following chart: