Morning from Europe.

The Powell press conference had dovish vibes tattooed all over it as markets perceived the hesitancy towards forward guidance despite strong data on Growth and Inflation as a sign of weakness or capitulation.

It was on the surface an ambiguous rhetoric from Powell as we balanced between two contradicting viewpoints:

1) Full acknowledgement of vanilla data (GDP, Non-farm, CPI) suggesting that they should remain tight(er) for longer, also backing the dot plot from September

2) A few caveats introduced with higher long-term bond yields / term-premias being used as an “excuse” for tighter conditions than in June/September

The latter is a dangerous feedback loop. If Powell accepts that market conditions dictate the path for the Fed Funds rate, the dovish reaction seen in market rates and equities yesterday implicitly leads to a more hawkish reaction function.

If 10yr bond yields are down 25-50 bps and equities are 5-10% higher come December, can they then refrain from hiking? I doubt it.

Chart 1: Financial conditions are not particularly tough from a momentum perspective