Powell put the cat among the doves with his sudden emphasis on the health of the labour market over and above inflation, basically saying the Fed won’t tolerate a weaker employment outlook. That lowered the bar for an outsized cut of 50 basis points in September, with futures now implying a 38% chance of such a move and 103 basis points of easing by Christmas.
Ten-year yields of 3.79% are just 10 basis points under the two-year and it can’t be long before the curve turns properly positive. Indeed, it’s surprising that hasn’t happened already, particularly given the sheer scale of Treasury issuance, and suggests something extra is keeping longer-term yields down.
Time is also running out for the inverted curve to predict a recession, though the Atlanta Fed GDPNow measure has slowed to an annualised 2.0%, from 2.4% mid-month. Figures on real consumer spending on Friday will help refine that number, and could actually be more important than the core PCE deflator given Powell’s focus on growth and employment.
