Risk Assets Rally as Waller Points to Disinflation Progress

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In Today’s Note

• Risk assets rallied and the S&P 500 posted its best day in a month after Federal Reserve Governor Christopher Waller pointed to "signs of disinflation" and signalled he could support holding rates steady in September, trimming market-implied odds of a 25bps rate hike to 50.2% from 63% a day earlier.
• Bitcoin and Ether rose alongside the broader risk-on move as front-end Treasury yields and the US dollar fell; attention now turns to today’s August nonfarm payrolls report, where economists expect a 55,000 gain in payrolls and the unemployment rate to hold at 4.1%.

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Market Snapshot: Overnight Moves

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Macro & Markets

• BTC climbed past $82K while the S&P 500 Index registered its best day in a month as risk-assets all rallied following comments from Federal Reserve Governor Christopher Waller.
• During a speech in Washington yesterday Governor Waller claimed that “recent data suggest we are finally seeing some signs of disinflation”.
• According to the Fed policymaker, “if this continues in the data due over the next two weeks, I would be inclined to support holding the target for the federal funds rate at its current setting”, referring to the upcoming August inflation report.
• The comments from Waller indicate a slight shift in his outlook for monetary policy relative to a speech he delivered in mid-July.
• There, he warned that “no matter how you cut it, or what measure you want to use, inflation is up this year” and that “inflation and monetary policy are at a crossroads”.
• In the speech back then Waller also claimed that "If we get another hot reading on core inflation this week, then the FOMC will need to consider tightening monetary policy in the near term”.
• The July CPI report he was referring to ultimately came in below market expectations, with the headline MoM CPI declining 0.4%, its first single-month decline since April 2020.
• Nonetheless, in his speech yesterday Waller warned twice that he would be inclined to support a hike if the inflation data reverses its trend.
• First he said “if inflation comes in hot, I would consider a rate hike” and later in his speech he said, “If there is evidence that progress toward 2 percent inflation reversed in August, a small adjustment in our stance would help ensure that it resumes.”
• Markets ultimately interpreted Waller’s speech as a dovish signal however.
• Fed funds futures currently price in a 50.2% probability for a 25bps rate hike in the upcoming September meeting, down from 63% only a day earlier.
• US treasuries also rose following the speech, with yields falling across maturities, particularly at the front-end of the curve.
• The yield on the two-year note, most sensitive to monetary policy, was trading around 4.37% prior to Waller’s speech and had fallen to a low of 4.31% afterwards.
• Finally, the US dollar declined by as much as 0.5%.
• Today markets will be focused on the nonfarm payrolls report due to be released later today. Economists estimate the report to show a 55,000 rise in payrolls after an unexpected decline in July and the unemployment rate to hold steady at 4.1%.

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