Dovish Comments From Brainard Send Futures Back Over 4,000

If the risk rally was hobbled overnight following hawkish comments from Fed Governor Waller who said that markets had “gotten way out in front” in their response to Thursday’s CPI print and noted that policy is “barely restrictive”, moments ago they just got a second wind after Fed Vice Chair Lael Brainard – who has clearly lasered-in on becoming the outspoken Dem’s preferred candidate for next FOMC chair once Powell becomes dispensable after 2-3 subzero payroll prints – echoed her previous “dovish cop” repertoire at 1130am this morning when she said that the time was soon coming for the central bank to moderate the size of its interest-rate increases, even as she stressed that it was not yet ready to pause.

“It will probably be appropriate soon to move to a slower pace of increases,” Brainard said Monday in a fireside-chat event at Bloomberg’s Washington bureau. “But I think what’s really important to emphasize, we’ve done a lot, but we have additional work to do.”

And in an even clearer case that Powell’s #2 is increasingly focused on what will break next (for an extended discussion please see this article), she said that she is increasingly focused on the risk of tightening spillovers…

• *BRAINARD:FED VERY FOCUSED ON POTENTIAL SPILLOVERS OF TIGHTENING

… and – for the first time this tightening cycle – uttered the phrase “two-sided” risks:

• *BRAINARD: RISKS BECOME MORE TWO-SIDED AS RATES MORE RESTRICTIVE

The most aggressive tightening campaign since the 1980s has included rate hikes of three-quarters of a percentage point at each of the last four policy meetings, triple the usual move, and have brought liquidity in the US Treasury market – the world’s largest and (formerly) deepest – to virtually nil.

Investors now expect Fed officials to opt for a smaller, half-point hike at their Dec. 13-14 meeting following a signal from Chair Jerome Powell on Nov. 2 that such a downshift was in the offing, and a subsequent Labor Department report on Nov. 10 which showed increases in US consumer prices may be starting to moderate.

Last week, inflation cooled by more than expected in October, with the consumer price index rising 7.7% from a year earlier versus 8.2% the month before, sending risk assets soaring in the 3rd biggest one-day rally of all time.  But officials have stressed that they need to see a series of lower monthly readings to have confidence that price pressures are heading back down to levels consistent with the central bank’s 2% target.

“The most recent CPI inflation print suggests that maybe the core PCE measure that we really focus on might be also showing a little bit of a reduction,” Brainard said. “That would be welcome.”

While officials in September forecast rates would reach 4.6% in 2023, but Powell on Nov. 2 suggested projections for the so-called terminal rate would probably move higher when they are next updated at the December meeting.  But Brainard poured dovish water on that too:

• *BRAINARD: REALLY HARD TO SAY WHAT RATE PATH LOOKS LIKE NOW

Her comments were enough to reverse what was a slide to near session lows, and push spoos back over 4,000, a closely watched level which if defended and becomes support, will likely propel stocks to 4,200 next.