The Market Today

Fed Officials Try to Calm Speculation


by Craig Dismuke, Dudley Carter

TODAY’S CALENDAR

Manufacturing PMIs, Construction Spending, Job Openings, and Auto Sales: At 8:45 a.m. CT, the January Markit Manufacturing PMI will be finalized.  At 9:00 a.m., the ISM Manufacturing index is expected to decline from 58.7 to 57.5 which would be the weakest level in 14 months. Also at 9:00 a.m., December’s construction spending figures are expected to improve while job openings are expected to pull back again in the December JOLTs report.  January auto sales tallies will be released throughout the day.

Busy Day for Corporate Earnings: It is one of the busiest days on the corporate earnings calendar.  Exxon Mobil already reported this morning, beating earnings expectations posting their best results since 2014. They significantly increased their outlook for investment in 2022 after the recent traction in oil prices. Scheduled to report after the close are Alphabet, PayPal, GM, and AMD among others.

Friday Jobs Report: Looking ahead to Friday’s jobs reports, the WSJ offered a partial explanation for the confounding trend in education jobs.  There remain 704k education payrolls missing since February 2020 (see Chart of the Day). In an article published yesterday, “Burned out teachers are leaving the classroom for jobs in the private sector, where talent-hungry companies are hiring them—and often boosting their pay—to work in sales, software, healthcare and training, among other fields.”


FED COMMUNICATIONS COOL FERVOR

Fed’s Bostic Clarifies Weekend Comment About Half-Point Hike: Atlanta Fed President Bostic said in a Monday interview that “it’s really important for people to know that we’re not set on any particular set progression in terms of policy.” In a weekend interview, Bostic made headlines by saying a 50-bp hike at the March meeting was a possibility. In his Monday remarks, Bostic said that while all options are on the table, he currently prefers and expects a quarter-point increase at the March meeting and three hikes total in 2022.

Fed’s George Said Transition to Tighter Policy Could Be “Bumpy”: Kansas City Fed Bank President George, a current-year voter, said the Fed’s shift to “Removing accommodation is easily justified.” In a prepared speech, George said, “With inflation running at close to a 40-year high, considerable momentum in demand growth, and abundant signs and reports of labor market tightness, the current very accommodative stance of monetary policy is out of sync with the economic outlook.” Although she supports plans for “interest rate increases and significant reductions in asset holdings,” George acknowledged that the “transition could be a bumpy one, with the prospect of asset valuation adjustments and the recalibration of supply and demand towards a new equilibrium.”

Fed’s Daly Supports Gradual Increases, Open to March Move: San Francisco Fed President Daly, a prominent dove at the U.S. central bank, said again on Monday that she could support a rate hike at the March meeting. Unlike some of her more hawkish colleagues, she believes that policy tightening should be “gradual and not disruptive.” Daly acknowledged that inflation is too high but also stressed that the labor market has yet to recoup many of the jobs lost during the pandemic. While the jobs market may currently be tight, there is the possibility that labor supply returns. “You don’t want, in my judgment, to overreact and ratchet up the rate so quickly that, as the rates percolate through the economy, it bridles it more than you think,” Daly said.

Fed’s Barkin Wants to Begin Process of Moving Policy Closer To Neutral: Richmond Fed President Barkin said Monday, “I’d like us to be in a better position – somewhere closer to neutral certainly than we are now. And I think the pace of that just depends on inflation.” Barkin is anticipating the unusually strong inflation pressure emanating from the goods economy will ebb this year and is monitoring wage pressures for a possible sign that services inflation could pick up. Barkin said Omicron is likely to affect this Friday’s payroll report but believes the impact will be temporary.


OTHER ECONOMIC NEWS

Dallas Fed Manufacturing Index Falls on Mixed Underlying Details: The Dallas Fed’s regional manufacturing index was weaker than expected in January, slipping from a revised-lower 7.8 to 2.0, its lowest level since July 2020. The underlying details, however, were less concerning. Production pulled back to an eight-month low and shipments slipped to their lowest level since June 2020. New orders, however, rose and remained at a respectable level historically and employment cooled but remained high. Additionally, there was some evidence of less supply-chain congestion. Supplier delays were the least severe in eleven months and prices paid and received extended a recent decline. Businesses reported the greatest level of outlook uncertainty since the initial pandemic wave, a fact reflected in the forward-looking metrics. Expectations for orders slumped, prices paid for raw materials were expected to rise, and the future employment index jumped to a record high.


TRADING ACTVITY

Stocks Rallied to Pare January Loss: Stocks rallied Monday to pare a sharp monthly decline that was fueled by concerns about shifting central bank policy amid historically fast inflation. Several Fed officials spoke publicly Monday (more above), reinforcing the signal from last week’s policy Statement that a March hike is a near certainty. The subsequent pace, however, remains open for debate. The beat-up tech sector led the broad strength that began shortly after the opening bell and grew gradually and steadily throughout the day. The Nasdaq rallied 3.4% while the S&P 500 jumped 1.9%, supported by gains in all eleven underlying sectors. The Dow trailed behind with a solid 1.2% gain. Despite the daily strength, the S&P 500 (-5.3%) and Nasdaq (-9.0%) both registered their largest monthly declines since March 2020. Treasury yields rose overnight but gradually bled away most of those gains as equities climbed. After rising as far as 1.21%, the 2-year yield ended 1.6 bps higher at 1.18%. The 5-year yield dipped 0.3 bps to 1.61% after crossing above 1.65% during European trading. The 10-year yield added 0.7 bps to 1.78%, ending below Monday’s peak of 1.81%.

Global shares carried the torch of positive momentum on Tuesday. While several markets in Asia remained closed for the Lunar New Year holiday, those that were open generally improved. Japan’s Nikkei inched higher after the manufacturing PMI rose 1.1 point to 55.4, its highest reading since February 2014. Europe’s Stoxx 600 was earlier up 1.3% despite the region’s initial PMI estimate for January being revised from 59.0 to 58.7. Unemployment in the Eurozone improved more than expected in December from 7.1% to a new record low of 7.0%. U.S futures, however, leveled off following a strong two-day recovery. The S&P 500 and Dow were little changed while the Nasdaq rose more than 0.3%. The Nasdaq remains in a correction following its worst month since March 2020. The index, however, has recovered 6.6% over the last two sessions, its strongest two-day gain since April 2020. At 7:30 a.m. CT, the Treasury curve had shifted lower in parallel fashion by around 2 bps. The 2-year yield was 2.0 bps lower at 1.16% while the 10-year yield fell 1.9 bps to 1.76%.


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