- The FED Reserve bank of Minneapolis indicated they are looking for a 5.40% rate to bridge inflation. This is the second FED reserve bank president to come out and indicate the FED would need to continue to raise rates to combat the strong labor market. Officials previously said they would raise rates to 5.10% in 2023, according to their median estimate. I suspect we will continue to see a 25bps move over the next two meetings, and pressure on paper will be about where we are now (slow down in price) until we get through the next two months.
- In step with the above bullet, Powell stuck to his message that interest rates will need to keep rising. His remarks suggest the 5.10% peak forecast is a "soft ceiling" and said the process will take a significant period to "get right." Powell also indicated that borrowing costs might reach higher than traders and policymakers anticipate. Powell closed by suggesting that easing pressure in the labor market is part of the answer to cooling off inflation in core services excluding housing.
- The Atlanta FED Reserve Bank President indicated Monday that January's strong jobs report raises the possibility that the Central Bank will need to increase rates to a higher peak than policymakers had expected. This comment is filtering through the markets; therefore, we have seen fixed-income trade-offs over the last few days.
- Economists at Goldman indicated that the risk of a US recession is receding amid a strong jobs market and signs of improving business sentiment. The Goldman team cut its estimate for the probability of a recession in the next 12 months to 25% from 35%. I agree with this stance, as a soft landing could be achieved, and the FED is doing its best (with the last move of 25bps) to accomplish this.
- S&P downgraded the PA hospital chain Tower Health two notches to B, citing continuing operating losses and a steep decline in unrestricted reserves. This issue is another reason The DRL Group does not trade this credit class.
- Bloomberg published a model showing an improving supply condition, the main factor behind the decline in US headline CPI inflation since June, along with weaker demand. Overall, the FED needs to deal with demand-side pressures, which will keep rates moving up from a FED perspective.
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