The Market Today
Consumer Inflation Closes 2020 with a Dud
by Craig Dismuke, Dudley Carter
CORONAVIRUS UPDATE (VS Coronavirus Chartbook – PDF)
Monitoring the Virus Headlines: Much attention as of late has been on the rise in stocks and yields fueled by investors betting the new Democratic-controlled U.S. government will focus on doling out more stimulus. However, Tuesday’s virus headlines served as a reminder of the difficult months still ahead. Outside of the U.S., reports prior to the U.S. trading session indicated Germany was considering extending its lockdown deep into March. Later, Belgium announced it had extended its lockdown until March 1. The Dutch PM said the lockdown in the Netherlands would be extended by three weeks until February 9 and more government aid would follow. Closer to home, Ontario’s premier said the province’s residents would be subject to a two-week stay-at-home order, allowing only essential trips outside of the home, as the virus outbreak has pushed its healthcare system to the “brink of collapse.” As for the U.S., reports indicated the federal government was planning to require negative tests for any international visitor as the country deals with its own severe outbreak. The director of the CDC said many areas of the country were on the path to experiencing exponential spread. In a bit of more positive news, U.S. health officials said that vaccine doses held back in reserves could now be unleashed and provided to anyone 65 or older or with a pre-existing condition. The effort, aimed at quickening the pace of inoculations, is said to begin in two weeks.
Consumer Inflation Closes 2020 with a Dud: In what is likely to take center stage in 2021, in terms of economic indicators, the December CPI inflation report showed another soft month for core inflation and overall inflation remaining well below the Fed’s objective. Headline CPI rose 0.37% MoM on a 4.5% increase in energy prices and a 0.3% increase in food. Core prices, however, rose a tepid 0.09% MoM, keeping the year-over-year rate at 1.6%. Looking at the big-ticket core items, rents rose 0.1% MoM continuing the weak trajectory which began with the pandemic. Medical care inflation fell 0.2% MoM on a drop in medical care commodity prices, bringing the YoY rate of medical care inflation down from 5.0% in July to 1.8% in December. While apparel prices continued to recover from their pandemic bludgeoning, up 1.4% MoM in December, the remainder of the report shows that broad inflation pressures remain a distant concern.
Mortgage Applications Start 2021 with a Bang: Mortgage applications rose 16.7% for the week ending January 8 despite a 2 bps uptick in the average 30-year mortgage rate. The average 30-year rate rose to 2.88% but remains near its all-time low of 2.85% set in December. Purchase apps rose 8.0% while refi apps jumped 20.1%. The housing indicators continue to point to strength.
Budget Statement, Beige Book, Fedspeak: Treasury will release its December Monthly Budget Statement at 1:00 p.m. CT, a report expected to show another record-high 12-month deficit. The Fed will release its Beige Book report in advance of its January 27 meeting at 1:00 p.m. There are several Fed officials on the tape today: Bullard (8:30 a.m.), Kashkari (8:30 a.m.), Brainard (12:00 noon), Harker (1:00 p.m.), and Clarida (2:00 p.m.).
Treasury Yields Reversed Overnight Increase Even as Small Caps Set a New Record High: Treasury yields faded an overnight increase during Tuesday’s U.S. session as U.S. equities fluctuated before finishing the day with small gains. Treasury yields had perked up overnight amid a broad increase in global sovereign yields, attributed largely to a day of auctions across multiple countries and the lingering technical effects of last week’s surge. However, the peak for the day was put in around 10 a.m. CT and a steady decline ensued through a solid auction of 10-year notes. The $38 billion auction stopped through by nearly 1 bp and drew increased interest from direct bidders. After adding as many as 4 bps by mid-morning to 1.186%, a new high since March, a persistent decline through the afternoon left the 10-year yield down 1.7 bps to 1.13%. Stocks appeared less convicted directionally, moving in and out of negative territory before ending little changed. The S&P 500 ended flat, the Dow added 0.2%, and the Nasdaq led with a 0.3% improvement. While the overall gain was modest, the underlying sector changes, with cyclicals leading more growth-oriented stocks, continued to point to some economic optimism. Adding emphasis to investors’ hopes for the recovery, the Russell 2000 index, which is focused on the smaller “main street” public companies, jumped 1.8% to a record high.
Markets Struggle as Investors Await Another Catalyst: Global markets remain stuck in limbo overnight as investors await a catalyst to either further strengthen the recent optimism that has boosted equities and sovereign yields or reverse the trend definitively lower. Global equities were again struggling for direction overnight, as Chinese indices disrupted a slightly positive day in Asia while small losses for most European indices kept Stoxx 600 essentially flat. Quiet economic calendars kept the focus on the virus developments (discussed above) that have increased worries about the recovery and urgency about vaccine rollouts. After reporting that it had essentially defeated the virus, China has locked down a couple of provinces following outbreaks and European countries were pushing out the end of lockdowns. With the U.S. outbreak also in a worrisome state, the collective concerns have dampened the stimulus-fueled gains for stocks and yields from last week. Prior to this morning’s inflation report and a House vote on impeachment planned for later in the day, U.S. equity futures were down between 0.2% and 0.4% and Treasury yields were hardly changed on the day, with the 10-year yield flat at 7:28 a.m. CT.
November’s JOLTS Data Less Impactful After Economy Shed Jobs in December: Largely rendered void by December’s payroll decline, the lagged November JOLTS data showed a smaller-than-expected decline in job openings, a second monthly increase for layoffs, and a minor pick-up in the pace of hires and quits. Openings, which declined 105k to 6.53 million, have bounced around that level since recovering from a plunge below 5 million in April and are still running below 2019’s average pace of 7.2 million. The recent rise for layoffs follows a surprising dip to a record-low level after the initial spike in March. While the small increase in hires closed the gap with the pre-pandemic trend, the number of people quitting their jobs, considered a sign of optimism in the labor market outlook, remains well off the pre-virus path.
Rosengren Sees Need for Sustained Support Until Vaccine Rollout Can Spark Organic Recovery: Boston Fed President Rosengren said he’s somewhat optimistic about the pace of recovery in 2021 but said the Fed and Congress will need to provide continued support. The rollout of vaccines could drive a robust recovery in the second half of the year that could result in “significant” job gains over the next couple of years, but doesn’t expect inflation to hit 2% consistently for at least a couple of years. He also noted that asset purchases should continue until the economy has a firmer footing and expects it will be a while before officials discuss plans for tapering the pace of the program.
George Sees Policy as Well-Positioned: Kansas City Fed President Esther George reiterated the main message of the Fed’s shift to an average inflation targeting framework, saying that a slight break for inflation above 2% won’t elicit a Fed response unless it’s expected to be sustained for some time. She said policy is currently well positioned and indicated that the risk of being patient is minimal considering she believes the Fed is “quite able” to slow inflation if needed.
Bullard Keeps His Inflation Bet but Says Bond Buying Should Continue: St. Louis Fed President Bullard remains one of the more confident officials that inflation will start to move higher, but still believes the Fed is “not close” to a point where it needs to begin pulling back on the bond buying program. He admitted that financial stability risks are a bit of a concern, but said he’s not sure that valuations are too far off the mark.
Mester Says Fed Will Remain “Patiently Accommodative”: Kansas City Fed President Mester said she’s optimistic about the recovery in 2021, but noted that much of its success will depend on how the vaccine rollout goes. She agreed with George that policy is in a good place and said the Fed should remain “patiently accommodative.”