The Market Today

Fed Communications Portending Faster Liftoff Flatten Curve


by Craig Dismuke, Dudley Carter

TODAY’S CALENDAR

Busy Week Kicks Off with Dallas Fed Index: This week’s economic calendar brings important reports including important corporate earnings reports, the ISM surveys, construction spending, auto sales, and the January jobs numbers.  Notably, the January jobs data will be based on the January 9-15 reference week, a week that saw 5.6 million COVID-19 cases officially confirmed, not including at-home test results. At 9:30 a.m. CT, the Dallas Fed’s report on regional manufacturing activity will be released.

Fed Communications Portending Faster Liftoff: Atlanta Fed Bank President Bostic made headlines late Friday when he told FT that he was open to a 50 bps at the March meeting if needed, capping off a week that saw a bit of a sea change in expectations for the Fed this year.  By the end of last week, on the heels of Fed Chair Powell’s press conference (more below), JPMorgan and Goldman Sachs both raised their rate forecast for 2022 to include 5 hikes (125 bps total) and Bank of America projected 7 hikes.  Fed funds futures contracts showed investor sentiment similarly shifted from 4 hikes to 5 (see Chart of the Day).  On the calendar today are San Francisco Fed Bank President Daly (10:30 a.m. CT.) and Kansas City’s President George (11:40 a.m.)


OTHER ECONOMIC NEWS

ICYMI – January 28, 2022 Weekly Market Recap: The recent flattening of the Treasury curve intensified last week after a surprisingly hawkish Fed Chair Powell led to speculation for more aggressive policy tightening in an attempt to tame inflation. Markets have been volatile this year and equities continued their wild swings. The S&P 500 sank 4.0% Monday before rebounding into positive territory, marking the largest intraday tumble before a positive close since October 2008. An afternoon rally Friday ended a three-week string of declines. The economic data were mixed. The economy grew at an annualized 6.9% rate in the fourth quarter, with an inventory boost accounting for 4.9% of the gain. The GDP price deflator also rose 6.9%. Consumer spending contracted in December and consumer confidence was weaker than expected in January, providing additional evidence that activity slowed during Omicron’s spread. However, the focus was on Wednesday’s Fed decision. As expected, the Statement strongly hinted at a rate increase in March. Yields soared, however, as Chair Powell surprised markets by hawkishly differentiating between the state of the economy now and during the prior cycle, implying these differences, including inflation that is much higher, would likely warrant a faster pace of tightening. Core PCE climbed more than expected to 4.9% in December, the fastest rate since 1983. By Friday, the 2-year 10-year Treasury spread flattened to 60 bps, its lowest level since October 2020. For the week, fed funds futures repriced for up to five hikes this year, pushing the 2-year yield up 16.1 bps to 1.16%, marking the highest weekly close since February 2020. Click here to view the full recap.


TRADING ACTVITY

Curve Flattening Continues Ahead of Final January Session: A tumultuous January for global equities appears set for a mixed finish with major indices moving in different directions as global sovereign yields shift higher. Stocks across Asia closed mostly higher, although several key countries, including China, were closed or shut down early on the eve of the Lunar New Year. Separate PMIs released over the weekend showed China’s economy slowed in January as case clusters led to lockdowns of several major cities under the country’s strict zero-COVID-19 policy, highlighting a key risk to the global supply chain. The large-manufacturers index fell from 50.3 to 50.1 while the small-to-medium-sized industry index dropped from 50.9 to 49.1. Europe’s Stoxx 600 was 0.5% higher before 7 a.m. CT on the heels of the first 4Q21 GDP estimate. The Eurozone’s economy grew 0.3% QoQ (not annualized; expected 0.4%) and an as-expected 4.6% YoY. Germany’s 10-year yield rose back above 0.00% and was leading broad gains across Europe following hotter-than-expected January CPI data. The CPI index rose 0.4% MoM (expected -0.2%) and 4.9% YoY (expected 4.4%). Treasury yields rose but trailed larger European gains and the curve continued to flatten. The 10-year yield was 3.4 bps higher at 1.80%. The 2-year yield added 4.8 bps to 1.21%, forcing the spread between the two securities below 59 bps to its lowest level since October 2020. At 7 a.m. CT, U.S. equity index futures were up to 0.6% weaker.


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