The Market Today

Fed Week – Fed Expected to Hasten Taper Process


by Craig Dismuke, Dudley Carter

TODAY’S CALENDAR

Important Week for Central Banks, Fed Expected to Hasten Taper: There are no economic reports on the calendar today. This week brings monetary policy decisions from the Fed, the ECB, and the BOE.  The Fed, announcing its policy decision on Wednesday, is expected to hasten the pace of tapering from $15 billion per month to $30 billion.  This would result in an end to balance sheet growth by March, bringing the option to hike rates forward.  Investors, evidenced by Fed Funds futures contracts, are now expecting a hike may occur as early as May 2022 (see Chart of the Day).  However, as those expectations have moved closer, longer futures contracts show that investors have simultaneously lowered their long-run expectations for the overnight rate.


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OTHER ECONOMIC NEWS

ICYMI – December 10, 2021 Weekly Market Recap: The Treasury curve steepened higher last week as market sentiment recuperated after multiple doses of data indicated the Omicron variant may be less severe than initially feared. The move higher for yields began immediately Monday following weekend reports out of South Africa that noted hospitalizations remained subdued a couple of weeks after the heavily mutated variant was publicly identified. Hopes that it may generally produce mild health consequences was further boosted by subsequent health studies, including early lab results from Pfizer showing a third dose of the company’s vaccine led to similar efficacy against Omicron as two doses against the original strain and earlier variants. A relatively light economic calendar included more evidence of a tight labor market and crescendoed into Friday’s CPI report. Job openings rose more than expected back near record levels and the weekly jobless claims data were encouraging. Headline CPI inflation rose 0.8% in November, accelerating from 6.2% to 6.8% on an annual basis, the fastest rate since 1982. Core prices rose 0.5% for the month and strengthened from 4.6% to 4.9%, the fastest rate since 1991. While not as severe as readings from October or over the summer, pressures remain strong and broad, bolstering the Fed’s case for announcing a faster taper this week. Click here to view the full recap.


TRADING ACTVITY

Curve Flattens on First Day of Fed Week: Sovereign yield curves flattened Monday as investors look ahead to a raft of central bank meetings this week. Virus cases are rising around the world as Omicron spreads. However, the early data has spurred hopes the variant lacks the lethality first feared when the heavily mutated strain was identified a couple of weeks ago. Economies will surely not go unscathed by Omicron’s spread, as countries around the world have already implemented restrictions to slow it down. Nonetheless, potentially milder health risks pose milder economic risks and the focus on fast inflation remains acute, with data last Friday showing U.S. prices rising in November at the fastest rate since 1982 (more above). With the Fed leading the central bank charge and expected to sound more hawkish when they announce their decision on Wednesday, shorter U.S. yields moved higher early Monday while longer yields declined. At 7:15 a.m. CT, the 2-year yield had added 1.2 bps to 0.67% while the 10-year yield fell 1.9 bps to 1.47%. The 5-year yield was essentially unchanged at 1.25%. U.S. equity index futures were clinging to small gains while oil prices declined.


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