The Market Today

Fed Officials Float March Hike


by Craig Dismuke, Dudley Carter

TODAY’S CALENDAR

Initial Claims Jump but Continuing Claims Lowest Since ’73: Initial jobless claims for the week ending January 8 rose more than expected, up 23k to 230k.  On a non-seasonally adjusted basis, claims rose from 316k to 419k, the highest weekly reading since May. Initial claims typically rise in the first two weeks of a year, but this was a notably sizeable increase, and likely reflective of a modest increase in new claims from the omicron wave. Continuing jobless claims for the week ending January 1 fell much more than expected, down 194k to 1.56mm, the lowest level since 1973.

Production Prices Remain Firm, Food and Energy Prices Pull Back: Producer prices rose 0.2% MoM in December as food and energy prices declined and core production prices slowed their growth.  Final demand food prices fell 0.6% while energy prices dropped 3.3%.  This marks just the second monthly decline in 2021 for both categories, which are now up 12.9% and 31.4% for the year, respectively.  Excluding food and energy prices, core goods producer prices rose 0.5% MoM bringing the YoY rate to +8.3%. On the services side, prices rose 0.5% MoM.  Contributing to that was a 5.3% increase in transportation prices for passengers.

Brainard Says Fighting Inflation without Interrupting the Recovery Is Fed’s Top Goal: Current Fed Governor Lael Brainard will appear before a Senate committee this morning at 9 a.m. CT for a confirmation hearing to be the central bank’s next Vice Chair. The Fed released her prepared testimony late Wednesday afternoon. “We are seeing the strongest rebound in growth and decline in unemployment of any recovery in the past five decades,” Brainard will say, “But inflation is too high, and working people around the country are concerned about how far their paychecks will go.” Therefore, “Our monetary policy is focused on getting inflation back down to 2 percent while sustaining a recovery that includes everyone. This is our most important task.”

Fed’s Harker Expects Three 2022 Hikes with First Possibly in March: Philadelphia Fed President Harker said earlier this morning he expects “a fair amount of tightening in 2022” and is “very open to starting in March.” Harker said, “I currently have three increases in for this year,” but noted that “I’d be open to more if that’s required.” He expects growth will remain positive but anticipates it will “be a little slower this year, perhaps in the range of three to four percent,” in part because “financial conditions should tighten and pandemic stimulus programs will wane.”

More Fedspeak: Also on the calendar today will be Richmond President Barkin (11:00 a.m.) and Chicago President Evans (12:00 noon).


OTHER ECONOMIC NEWS

Bullard Believes the Fed Should Hike Four Times this Year: St. Louis Fed President Bullard said in an interview with the Wall Street Journal on Wednesday, “I actually now think we should maybe go to four hikes in 2022” with the first move in March. After saying asset purchases “overstayed their welcome,” Bullard noted, “we should, in tandem with the rate hikes I’m recommending, also allow passive runoff of the balance sheet, beginning in the spring.” Bullard said, “These are some of the tightest labor markets that you’ll ever see in the United States, …and I’m now expecting the unemployment rate in 2022 to breach the 3% threshold.”

Beige Book Notes Supply Strains, Omicron Effect, Tight Labor Market, Some Moderation of Solid Inflation Pressures: The Fed’s December Beige Book indicated a slight slowdown in growth to a modest pace at the end of 2021. Broadly, “demand for materials and inputs, and demand for workers, remained elevated among businesses.” However, supply chain issues and worker shortages continued to limit activity and Omicron’s spread caused a noticeable slowdown in certain sectors. “Most Districts noted a sudden pull back in leisure travel, hotel occupancy and patronage at restaurants” as case counts began to surge, the Book said, and “expectations for growth over the next several months cooled somewhat during the last few weeks.” Tight labor market conditions continued to reflect supply issues, not weak demand, and result in “robust wage growth nationwide.” The discussion noted “solid growth in prices charged to customers” but said some Districts “also noted that price increases had decelerated a bit from the robust pace experienced in recent months.”

Fed’s Daly, a Dove, Open to March Hike: San Francisco Fed Bank President Daly, considered to be among the most dovish officials at the central bank, said she sees a chance for raising rates in March. Daly noted in an interview Wednesday night, “I definitely see rate increases coming, as early as March even, because it really is clear that prices have been uncomfortably high. American consumers are feeling the pain.”


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TRADING ACTVITY

Stocks Extend Recovery Despite Shorter Treasury Yields Rising to New Cycle Highs: Stocks continued to recover Wednesday despite the Treasury curve flattening higher following the release of December’s highly anticipated CPI inflation report. The data reflected monthly price increases that were stronger than anticipated but annual gains that matched expectations. The idea that inflation pressures have broadened out continued to be supported by underlying changes and goods prices remained unusually firm. However, certain categories moderated and overall pressures weren’t as firm as in recent months. Regardless, markets have come to expect the Fed will tighten policy steadily throughout the year, reflected in the earlier yield surge to start the 2022. Yields edged higher again Wednesday, led by gains for shorter maturities. The 2-year yield added 3.6 bps to 0.92% and the 5-year yield gained 2.0 bps to 1.52%, both registering new highs for the cycle. The 10-year yield inched up 0.7 bps to 1.74%, a couple of basis points below last Friday’s cycle peak of 1.76%. The S&P 500 rose 0.3% to lead smaller gains for the Dow and Nasdaq, supported by positive contributions from all sectors excluding health care.

Markets Calm Thursday: Global equities leveled off overnight in Thursday’s session after several days of gains and Treasury yields were hovering close to unchanged near cycle-high levels. The mixed and subdued tone for world stocks began early in Asian trading and kept a lid on U.S. futures which were up by just over 0.1% before 7 a.m. CT. In addition to the market’s focus on inflation and Fed policy, which continued yesterday after a strong CPI reading and additional Fed calls for a March hike, big U.S. banks will kick off the fourth quarter corporate earnings season tomorrow. Prior to the release of the producer price inflation report and weekly jobless claims update this morning, the Treasury curve was lower by less than 1 bp, with longer yields leading those declines. Those yield levels held immediately after the 7:30 a.m. data were released.


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