The Market Today

Early Fed Communications Affirm March Hike

by Craig Dismuke, Dudley Carter


Personal Income Unchanged in January Despite Changes in Transfer Programs: Personal income was unchanged in January, beating expectations for a 0.3% decline.  Employment income grew 0.5% MoM but a decline in transfer payments eroded that.  The conclusion of the prepayment of the Child Tax Credit dragged “other transfers” down $133b MoM annualized.  That was partially offset by an increase in social security payments due to the cost-of-living adjustment.  Social security payments rose 6.2% MoM ($69b ann.). When adjusted for inflation, real disposable income fell 0.5% MoM.  Personal spending rose a strong-than-expected 2.1% in January, beating expectations for a 1.6% rebound from December’s contraction.  This brought the savings rate down 1.8% to 6.4%, its lowest level since 2013.

Core PCE Highest Since 1983: January’s PCE inflation figures were hot, as was expected.  Headline PCE rose 0.6% MoM bringing the year-over-year rate up from 5.8% to 6.1%.  Core PCE rose 0.5% MoM bringing the year-over-year rate up from 4.9% to 5.2%, the highest level since 1983. Overall, inflation was broad across the report with the exception of some pandemic-affected categories. Airfare prices fell 6.8% MoM, hotels down 4.2%, and auto rentals dropped 7.0%.

Home Sales, Consumer Confidence: January’s pending home sales report is expected to show a 0.2% rebound after falling 3.8% in December (9:00 a.m. CT).  The University of Michigan’s final February report on consumer confidence is expected to remain at 61.7, its lowest level since 2011 (9:00 a.m.).

Durable Goods Orders Beat Expectations: Durable goods orders were better than expected in the preliminary estimate for January and indications of business investment showed a surprisingly strong start to the first quarter for spending on equipment. Total durable goods orders rose 1.6% last month, topping the expected gain of 1.0%, and December’s previously projected 0.7% decline was revised notably higher to show a 1.2% gain. Stripping out marginally weaker auto orders and mixed results for defense and non-defense aircraft, orders for non-transportation related items rose 0.7%, better than the expected 0.4% gain. December’s gain for non-transportation orders was also revised up from 0.6% to 0.9%. Capital goods orders and shipments, which track business investment in equipment, were equally as strong. Core orders, which strip out defense spending and private aircraft activity, rose 0.9% (expected +0.3%) and shipments jumped 1.9% (expected +0.5%). As with overall durable goods orders, capital goods orders and shipments in December were also revised stronger.


Fed Officials Indicate March Hike Still Likely: Thursday’s public remarks from a handful of Fed officials, including a current-year voter, were overshadowed by the significant volatility that pervaded global markets (more below). The commentary, however, was important in that it gave an early indication of officials’ views on the potential impact of the geopolitical turmoil on plans to tighten policy this year. In separate appearances, Fed Presidents Barkin, Bostic, Daly, and Mester (voter) all acknowledged that the situation in Ukraine raised uncertainty around the outlook and posed risks to both growth and inflation. Each official also, however, signaled support for raising rates in March and beginning to tighten policy unless, as President Mester put it, there is a “material change” or “unexpected turn” in the outlook. In the initial bout of volatility, Fed funds futures shifted from pricing in a measurable chance of seven hikes this year to less than a one-hundred percent chance of six hikes. By Thursday’s close, futures had recovered and were back to fully expecting six hikes by the end of the year.

New Home Sales Cool after Back-to-Back Gains: The pace of new home sales came in close to expectations in January, although positive net revisions to prior months led to a larger-than-expected monthly decline. Annualized sales of new homes fell 4.5% in January to 801k, a larger decline than the 1.0% drop expected but roughly in line with the 803k pace economists forecasted. Combining positive revisions to each of the three months, total sales in the final quarter of 2021 were 70k higher than previously estimated. Nevertheless, evidence of a tight housing market remained. The annual price gain accelerated from 8.3% to 13.4%, still below stronger levels last year.  The share of sales (24%) and inventories (9%) that related to completed homes remained near record-low levels.

Kansas City Fed Index Beats on Broad Improvement: The Kansas City Fed’s Manufacturing Activity Index was stronger than expected in February, countering weakness in a similar survey published by the Richmond Fed Bank on Tuesday. The headline index rose 5 points to 29, beating expectations of 25 and matching the second strongest level on record. The details were broadly stronger, including solid gains for new orders, shipments, and employment, a modest decline in prices received, and modest improvement in supplier delivery delays.


Wild Day on Wall Street After Russia’s Invasion: As expected, volatility was pervasive across global markets Thursday after Russia launched a military invasion of Ukraine. The final closing levels for U.S. assets, however, were a bit of a surprise. Stocks across Asia and Europe had plunged overnight and U.S. futures were sharply lower ahead of U.S. trading. The military attack was broad across Ukraine and reached beyond the Donbas region, including around the capital of Kyiv. An early estimate from U.S. defense officials indicated Russia used more than 75 bombers and more than 100 missiles. Among the second tranche of sanctions rolled out by the West, President Biden announced new sanctions on the largest Russian banks, restrictions on Russian state-owned enterprises ability to raise capital, measures targeting additional Russian elites, and limitations on exports to Russia. The U.S. also targeted Belarusian persons and businesses for their role in the attack. While equities gapped lower at the open, the first tick would be the worst on the tape. The Dow and S&P 500 opened down 2.6% and the Nasdaq sank 3.5%. By Monday’s close the Dow was 0.3% higher, the S&P 500 had recovered to close up 1.5%, and the Nasdaq rallied to finish 3.4% higher. The intraday reversals were the sharpest since the Fed cut rates by 1.00% in response to the pandemic in March 2020. Crude climbed but closed well off overnight peaks. Brent finished at $99 per barrel after breaking above $105 earlier. Treasury yields slipped but ended well off the lows. The 2-year yield fell 2.2 bps to 1.58% after sliding as low as 1.46%. The 10-year yield ended down 2.8 bps to 1.96%, well above the session-low of 1.84%. Gold ended lower after a sharp early gain and the Dollar pared its gain.

Russia Reportedly Ready to Talk after Shelling Kyiv: The crisis in Ukraine remained the world’s focus on Friday as reports rolled in overnight that Russian forces were closing in on the capital city of Kyiv and Ukraine’s foreign minister said the capital was being hit by “horrific Russian rocket strikes.” Foreign equities, however, recovered following Wall Street’s massive positive reversal on Thursday. Stocks in Asia gained around 1% and Europe’s Stoxx 600 was up 2.5% and near session highs heading into the U.S. session. The index made a sharp move up just before 7 a.m. CT on a headline that Russia was ready to send a delegation to Minsk to hold discussions with Ukraine. U.S. futures had pulled back overnight but pushed higher and into positive territory. Russian stocks and the Ruble added to gains and oil prices moved back near session lows. Treasury yields, already on the rise before the headline, added to gains to hit new session highs. The 2-year yield was 3.4 bps higher at 1.61%, the 5-year yield rose 4.8 bps to 1.91%, and the 10-year yield added 3.7 bps to 2.00%.

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