The Market Today

Fed Expectations Evolving


by Craig Dismuke, Dudley Carter

TODAY’S CALANDER

The only report on today’s economic calendar is the December report on Consumer Credit (2:00 p.m. CT). Also worth watching given the impact of the ECB’s communications on U.S. yields last week, ECB President Lagarde will give a speech to the European Parliament at 9:45 a.m. CT this morning.


OTHER ECONOMIC NEWS

ICYMI – February 4, 2022 Weekly Market Recap: Treasury yields jumped in the second half of last week following a couple of hawkish central bank decisions and a confoundingly large increase in nonfarm payrolls in January’s jobs report. There were multiple data points released last week. Both ISM indices pulled back as expected as Omicron appeared to exacerbate existing headwinds. Auto sales were surprisingly strong and the latest JOLTS report reiterated that the labor market remained tight in December. The main focus, however, was on a pair of central bank decisions on Thursday and Friday’s payroll report. The Bank of England hiked rates again and voted to begin shrinking the size of the balance sheet. The European Central Bank held policy unchanged but President Lagarde sounded more concerned about record inflation. Yields in Europe surged Thursday after those announcements. ADP’s payroll report on Wednesday implied that hiring pulled back amid the latest case surge, adding to speculation that Friday’s payroll report would be unusually weak. Surprisingly, the level of job growth topped all economists’ expectations. The signal, however, was skewed by large changes to the BLS’s seasonal adjustments that also smoothed out hiring patterns in the prior year. Omicron did appear to have an impact, lowering hours worked which likely exaggerated the earnings growth and keeping a record number of employed people at home sick. Participation looked much stronger, but it too was clouded by annual population revisions. Unemployment rose slightly. The quality of the strength in the January jobs report will be scrutinized as will any comments from Fed officials about their interpretation. For the week, stocks rose and Treasury yields hit new cycle-highs. Click here to view the full recap.


TRADING ACTVITY

Calm Start Following Big Market Changes Last Week: U.S. equity futures were positive early Monday with the Nasdaq leading the gains and Treasury yields were mixed and steeper. The news flow over the weekend was relatively light with little content to alter the market’s focus. Foreign equity markets were mixed overnight as Asia returned to a full complement of trading after many national indices were closed sporadically last week for the Lunar New Year holiday. European yields continued to move higher after a hawkish decision from the Bank of England and signs of more concern at the European Central Bank about record inflation (more above). While German and French 10-year yields were less than 2 bps higher, the Italian 10-year added 9.7 bps to lead larger increases in the smaller countries. Despite the continued upward pressure there, U.S. Treasury yields were mixed as investors continued to digest last Friday’s noisy nonfarm payroll report (more above). After last week’s climb, the 2-year yield was 1.4 bps lower at 1.30%. The 10-year yield was 1.3 bps higher at 1.92%, a new high for the cycle.


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