The Market Today
Fed’s Preferred Inflation Metrics Continue to Rise
by Craig Dismuke, Dudley Carter
Personal Income and Spending Disappoint: Personal income disappointed expectations in December, rising just 0.3% MoM (exp. +0.5%). Employment income continued its run rising another 0.6% MoM. However, proprietors’ income dropped 1.4% creating the weaker results, at least part of which came from a decline in PPP loans. Transfer payments from government were down fractionally in December on a small decline in unemployment insurance payments. Personal income is now up 7.3% YoY and disposable income up 5.6%. When adjusted for inflation, real disposable personal income is down 0.2% YoY. Personal spending also disappointed expectations in December, down 0.6% for the month from a lower November level than initially reported. With income outpacing a weak rate of spending, the savings rate increased from 7.2% to 7.9%.
PCE Inflation Hottest in 40 Years: Headline PCE inflation rose 0.4% MoM in December bringing the YoY rate up from 5.7% to 5.8%, its highest level since 1982. Core PCE, the Fed’s preferred measure of consumer inflation, rose 0.5% MoM bringing the headline rate up from 4.7% to 4.9% (exp. +4.8%). By this measure, inflation is now at its highest since 1983.
ECI Hits 2001 High, Reflecting Continued Cost Pressure in Tight Labor Market: The Employment Cost Index rose 1.0% in the fourth quarter, a step down from the 1.3% increase in the third quarter but still the second-strongest quarterly gain since a same-sized gain 2006. On a year-over-year basis, the index accelerated from 3.7% to 4.0%, a sizeable increase from the 2.75% average in 2019 and the strongest level since 2001. The index is one of the Fed’s favorite gauges of inflation pressures in the labor market because it combines wage pressures with other employment-related costs that could impact businesses bottom lines and influence profit-protecting, inflation-inducing decisions to raise prices. The wages component rose 1.1%, firm but down from the record 1.5% pace in the third quarter, while the non-wage benefits portion rose just under 1.0%, the firmest quarter since 2014.
Consumer Confidence: At 9:00 a.m. CT, the University of Michigan’s final January report on consumer confidence will be released.
OTHER ECONOMIC NEWS
Pending Home Sales Decline More Than Expected in December: Pending home sales fell 3.8% in December, disappointing expectations for a 0.4% decline, with activity again slowing across all four geographic regions. Pending sales have pulled back for two consecutive months, ending a choppy uptrend from April to October and portending some weakness in existing home sales in the months ahead. At 117.7, the seasonally adjusted index remains below stronger levels from the second half of 2020 but still well above its pre-pandemic average. The NAR said, “Pending home sales faded toward the end of 2021, as a diminished housing supply offered consumers very few options,” adding, “Mortgage rates have climbed steadily the last several weeks, which unfortunately will ultimately push aside marginal buyers.” Wednesday’s weekly update showed the MBA’s average 30-year mortgage rate rose another 8 bps to 3.72%, a new high for the pandemic era. However, purchase applications have so far risen 1.1% in January compared with December.
Kansas City Fed Manufacturing Picks Up on Mixed Underlying Changes: The Kansas City Fed’s Manufacturing Index rose 2 points in January to 24, below stronger levels from the first half of 2021 but higher than most levels in pre-pandemic history. The details were mixed. Production picked up while orders and shipments both cooled. Employment strengthened but backlogs of orders increased. Supplier delays improved again but prices paid rose. The forward-looking metrics moved in a more consistent direction, pointing to expectations for stronger activity and employment but also continued supply chain issues and inflation pressures.
Curve Fell to Flattest Since October 2020 as Post-Fed Shift Continued: Stocks pulled back Thursday as shorter yields extended their post-Fed climb while longer yields unwound a large portion of their prior day’s rise. After gaining as much as 1.7% following a positive open, the Nasdaq declined steadily to close down 1.4% and at its lowest level since May. The tech-heavy index finished nearly 10% below its 200-day moving average and down 14.7% for the year. The S&P 500 slipped 0.5%, also closing again below its 200-day moving average and within a whisker of its lowest close since July. The Dow finished little changed. Data released before markets opened showed the economy grew 6.9% in the fourth quarter on a strong boost from inventories. Inflation also increased 6.9% in the final quarter of 2021. Nevertheless, the focus remained largely on Fed Chair Powell’s comments from Wednesday signaling the U.S. central bank may be on the brink of a quicker-than-expected path for tightening policy. After surging 13.3 bps Wednesday in the aftermath of Powell’s remarks, the 2-year yield added another 3.8 bps Thursday to close at 1.19%, its highest since February 2020. The 5-year yield, however, fell 2.6 bps to 1.66% and the 10-year yield sank 6.4 bps to 1.80%. The 2-year 10-year spread flattened nearly 10 bps to 61 bps, its tightest level since October 2020.
Treasury Yields Move Higher in Global Upswing Friday: Global stocks slumped Friday as sovereign yields in Europe and the U.S. rose. The French (+0.7% not annualized) and Spanish (+2.0% not annualized) economies grew more than expected in the fourth quarter while Germany’s (-0.7% not annualized) contracted by more than was anticipated. Economic confidence in the Eurozone as a whole slipped more than expected in January to a nine-month low on weakness across the industrial and services sectors. The attention, however, remained anchored on rising rates amid bets central banks will tighten more aggressively this year. Money markets expect the Bank of England could raise its target rate by 0.25% next week, sending the 2-year gilt yield 3.2 bps higher to 0.98%, its highest level since 2011. After another move higher, fed funds futures are almost fully pricing in 1.25% of tightening this year, with the possibility of something larger than a 0.25% hike in March. The 2-year Treasury yield rose 2.4 bps to 1.21%, a new high since February 2020. The 10-year Treasury yield rose 3.8 bps to 1.84%, trailing larger increases in longer yields across Europe. Europe’s Stoxx 600 slumped 1.9% and U.S. futures were lower. Dow futures were 0.9% lower while the Nasdaq slipped 0.6%, potentially shielded from a larger decline by better-than-expected quarter financial results from Apple after the bell on Thursday. After the disappointing income and spending data, shorter yields tumbled to session-lows and longer yields retreated. At 7:45 a.m. CT, the 2-year yield was 1.6 bps lower at 1.17% with the 10-year yield 1.5 bps higher at 1.81%.