The Market Today
Bank of England Hikes Again; ECB Holds for Now
by Craig Dismuke, Dudley Carter
Initial jobless claims for the week ending January 29 fell more than expected, down from 261k to 238k. Claims jumped in the first two weeks of January as COVID-19 cases climbed but appear to have peaked simultaneous with the peak in cases, with claims declining more than expected for two consecutive weeks. The number of confirmed COVID-19 cases decreased during the reference week from 5.2mm to 3.8mm. Continuing claims for the week ending January 22 fell from 1.672mm to 1.628mm, a smaller decline than expected but a decline nonetheless. Like initial claims, continuing claims appear to be following the same pattern.
Service Sector PMIs: At 8:45 a.m. CT, the final January Markit services and composite PMIs will be released. At 9:00 a.m., January’s ISM Services index and December’s Factory Orders report are both expected to decline.
OTHER ECONOMIC NEWS
ICYMI – January 2022 Monthly Review: Treasury yields rose rapidly to start 2022 despite signs the economy stuttered amid the Omicron outbreak, as inflation pressures remained firm and amid a barrage of hawkish Fed commentary. Omicron continued to surge around the globe but growing evidence indicated the health effects were milder than previous strains. While hiring disappointed in December, unemployment fell more than expected and below the Fed’s estimate of max employment with inflation running at its fastest rates in decades. That led an increasing number of Fed officials to indicate policy may need to be tightened more quickly than anticipated last December. As expected, the Fed’s January Statement strongly signaled for a March hike but Chair Powell surprised with his hawkish tone. Significant difference between today’s economy and the economy during the last tightening cycle will likely warrant a more aggressive pace than the every-other meeting approach previously followed. Yields soared and the curve flattened as futures priced in four hikes in 2022 with a chance of a fifth. Stocks slumped in response, posting their sharpest declines since March 2020. Click here to view the full recap.
Bank of England Hikes Rate and Begins Balance Sheet Run-off: As expected, the Bank of England raised rates 0.25% on Thursday in a razor-thin vote, marking the first time since 2004 the bank hiked rates at consecutive meetings and lifting the target rate to 0.50%. After disclosing the vote was close at 5-4, the Statement noted that “the minority preferred to increase Bank Rate by 0.5 percentage points, to 0.75%.” Additionally, officials agreed unanimously to begin shrinking the stock of bonds it had acquired during the pandemic. The portfolio of government bonds will roll-off as they mature. In addition to also ending reinvestment of corporate bond maturities, the bank announced that it will establish a plan to sell corporate bonds through the later part of 2023. The bank’s governor noted the economy is “roaring away” and cautioned that “we face the risk that some of the higher imported inflation could become entrained within the domestic economy, leading to a longer period of high inflation.”
ECB’s Sticks to Dovish Stance Despite Record Inflation: Less than an hour after the Bank of England’s decision, the European Central Bank announced it was keeping its policy plans unchanged for the time being. As announced at the December meeting, emergency asset purchases will end after March. The central bank will continue to slowly taper its monthly net asset purchases under its regular asset purchase program to a pace of 20 billion euros each month after October. While markets have moved to price in the possibility the ECB raises rates later this year, the Statement gave no hint in that direction. The forward guidance for rates was left unchanged. President Lagarde’s press conference is ongoing.
Treasury Yields Dipped As Stocks Rose for Fourth Day: Stocks struggled early despite strong overnight gains for futures as a rally in tech shares faded. The S&P 500 slowly erased opening gains, slipping into negative territory a couple of times. Shares of Google and AMD had rallied sharply overnight following strong earnings reports Tuesday afternoon, giving a lift to the tech sector more broadly. While those companies held on to strong gains, the rising tide receded from several popular names’ boats. Twitter and Netflix both dropped more than 4% and PayPal sank nearly 25% after disappointing financial results. Despite those dynamics weighing on the index, positive momentum picked back up and spread out across most other sectors in the afternoon. The S&P 500 closed up 0.9% and near session highs, notching its fourth consecutive gain to a 12-day high. The Dow rose 0.6% while the Nasdaq trailed with a 0.5% improvement. The unexpected contraction in ADP payrolls, not a complete surprise, had little perceptible lasting impact on markets. Treasury yields initially rose after the ADP report before turning back and ending lower for the day. The 2-year and 10-year yields fell 1.2 bps to 1.15% and 1.78%, respectively.
Tech Weighs on Equities; Rates Respond to Bank of England Decision: Tech shares turned south shortly after Wednesday’s market close as shares of Meta, the parent of Facebook, plunged following a disappointing earnings report. In addition to weaker-than-expected earnings, user growth stalled and the company’s forward guidance came in weaker than anticipated. The company’s stock tumbled and was down more than 22% ahead of U.S. trading. The ripple effects through the tech space dragged Nasdaq futures 2.1% lower at 7:30 a.m. CT. The S&P 500 fell 1.0% and the Dow dropped 0.2%. Treasury and other sovereign yields, however, rose as investors digested the latest decisions from central banks in the U.K. and Eurozone (more above). U.K. yields shot higher following the hawkish announcement from the Bank of England, pushing the 2-year gilt yield up 10.1 bps to 1.12%, its highest level since 2011, and the 10-year yield 9.1 bps higher to 1.34%. Other European yields rose by smaller amounts after a less eventful decision from the ECB, but were still leading smaller increases for Treasuries. The 2-year Treasury yield was 1.4 bps higher at 1.17% after the latest jobless claims data while the 10-year yield added 2.9 bps to 1.80%.