US OUTLOOK/OPINION: Market Moves Give Powell Room To Say "Transitory" Again(1/2)

Fed Chair Powell's speaking appearance Friday at 1125ET (text and Q&A expected) takes on additional importance in the aftermath of Wednesday's reciprocal tariff announcement. The main question is, to what extent does he see the tariffs as announced being "transitory", and how does he weigh the risk of rising inflation against what appears to be a threat to the Fed's employment mandate? 

• He probably won't deviate much from his line last month that "It's really hard to know how this is going to work out" with government policy, and it's "very, very challenging to unpack" how much of incoming inflation is due to tariffs. But the decomposition of the decline in yields over the last 24 hours gives Powell some room to express greater concern over the growth implications of tariff policy, even as he cautions that anchored inflation expectations are essential.
• Yields clearly show greater concern over the downside growth impact of tariffs than the upside inflationary impact: both in the implied Fed funds path which is now suggesting almost 4 Fed cuts are in play this year with the next earlier rather than later, but also in real yields and market-implied inflation breakevens.
• TIPS-implied 5Y yields are down about 21bp vs Wednesday's opening levels  (last 3.73%): TIPS breakeven inflation is down 4bp vs Wednesday's opening levels, with the bulk of the drop due to a 17+bp fall in real yields. 5Y5Y inflation swaps have fallen to their lowest since September.
• There's obviously a cross-asset correlation with the sharp decline in equities, both from the recent peak but also over the last 24 hours.
• But the drop in real yields has been pretty steady since Trump's inauguration - even as breakevens have edged up. The 5Y nominal yield is down about 65bp since then - real 5Y yields are down 70+bp, with 5Y breakevens up 5bp. Term Premia are around zero, 20bp below the pre-inauguration peak but above the negative levels in 2024).