The focus over the next two days will be on the inflation picture.
We get January CPI on Wednesday.
And starting tomorrow, Jerome Powell will be on Capitol Hill for two days of Congressional hearings on monetary policy.
We should expect hours of pontification from Congress on the perceived inflationary impact of tariffs.
And it comes as the tariff rollout is well underway, with a blanket 10% on China (addition to any existing tariffs), 25% on steel and aluminum signed today, and Trump said reciprocal tariffs will come over the next two days.
With that, despite the non-inflationary outcome of tariffs during Trump 1.0, and despite the Fed Chair's best efforts to convince markets that the committee would take a "wait-and-see" approach on Trump 2.0 policies, the Fed has already shown its bias on the Trump effect by adjusting policy (at least in the form of "guidance") for a hotter inflationary outlook.
Remember, above is the Fed's December Summary of Economic Projections. In anticipation of the Trump agenda, they revised UP growth, inflation and they took two projected Fed rate cuts off of the table.
So, with Jerome Powell due to spend the next two days fielding questions on tariffs and, importantly, on extending the 2017 Trump tax cuts, this will be the spot to watch, for markets …
This is the 10-year Treasury yield. And this is the interest rate that the new Treasury Secretary, Scott Bessent, has said they (the Trump administration) will be focused on — bringing it down.
Let's step through it.
The 10-year was trading around 4.80% going into last month's inflation number. And as we discussed in my notes, it was an uncomfortable level for the Fed. One hundred basis points worth of Fed rate cuts had resulted in a nearly 120 basis point rise in the 10-year yield.
And with the 5% level in spitting distance (a vulnerable level for financial stability and fiscal sustainability), the Fed already had two FOMC voters out working the media to counter the narrative of an inflation resurgence (i.e. trying to talk rates down).
A slightly cooler core inflation number came in on January 15th, and turned the tide. And the following day, Fed governor Waller was out telling us they could cut as many as four times this year. He was talking market rates down (the 10-year), and it worked.
Now, fast forward to this week. And we'll get the inflation number on Wednesday. And the fear of possible tariffs, has now materialized into policy.
And given the confluence of events this week (tariff implementation, Powell on Capitol Hill and inflation data), the 10-year yield at 4.50% looks vulnerable to another test higher.
That should put some pressure on stocks. And add fuel to the fire in this chart …
Gold is up 12% from the lows of December 30th. It's made 8 new record highs in the past nine trading days.
There is a powerful formula at work for gold: 1) hotter inflation concerns, 2) rising risk of war, with Trump's ultimatum on Hamas, and 3) Treasury Secretary Bessent's pre-nominee comments about what he thinks could be another Plaza Accord-type of "large scale globally coordinated currency, fiscal and monetary" agreement.
