The Market Today

FOMC Minutes Set Stage for More Rapid Tightening

by Craig Dismuke, Dudley Carter

VINING SPARKS ECONOMIC OUTLOOK WEBINAR: We will host our 2Q Economic Outlook Webinar this morning at 10 a.m. CT (click here to register).  We will walk through the current inflation environment, highlighting the uncertainty that lies ahead.  We will also look at the historic pivot for monetary policy during 1Q and the implications of the inverted yield curve that has resulted.


Lowest Initial Claims Since 1968, Continuing Claims Inch Higher Again: Initial jobless claims for the week ending April 2 fell 5k to 166k, the lowest level since 1968. Initial filings continue to grind lower, down in six of the past seven weeks, as the labor market continues to tighten.  However, continuing jobless claims for the week ending March 25 rose 17k to 1.52m.  They are now up 191k over the past two weekly reports after hitting their lowest level since 1970.  In a note accompanying the release, the BLS noted that they are now reverting back to their pre-pandemic seasonal adjustment methodology.  The seasonal adjustment factor has historically been multiplicative but was reasonably changed during the pandemic to be additive.

Fed Communications: Speaking today are St. Louis Bank President Bullard (8:00 a.m. CT), Atlanta President Bostic (1:00 p.m.), and Chicago President Evans (1:00 p.m.).


Minutes Set the Stage for Half-Point Hikes and Commencement of a More Rapid Drawdown of the Balance Sheet: The Minutes from the FOMC Meeting held on March 15 and 16 reflected the Fed’s increasingly hawkish posture towards defending its credibility, clearly laying out aggressive plans to tighten monetary policy at a rapid pace to try and rein in the fastest inflation since the 1980s. The Minutes noted that “one or more 50 basis point increases in the target range could be appropriate at future meetings” and indicated that “many” would have preferred a 50-bp hike in March, absent the uncertainty created by Russia’s invasion of Ukraine. The more novel news, however, related to the proposed details around how the Fed plans to shrink its balance sheet.

The Balance Sheet Plan: The Minutes noted that “all participants agreed” that differences in the economic situations then and now warranted a faster pace of runoff now than in the period from 2017 to 2019, with a signal towards the process beginning after the May meeting. In that regard, “Participants generally agreed that monthly caps of about $60 billion for Treasury securities and about $35 billion for agency MBS would likely be appropriate” and “could be phased in over a period of three months or modestly longer if market conditions warrant.” The size of the caps and phase-in period are more aggressive than in the normalization process announced in June 2017, when monthly caps of $10b ($6b Treasury, $4b MBS) were “gradually” stepped up “at three-month intervals over 12 months” to a final cap of $50b ($30b, $20b). Redemption of Treasury coupon payments would be prioritized with Treasury bill holdings used to take monthly roll-off up to the cap. As it relates to the Fed’s holding of agency MBS securities, officials generally considered the monthly cap as a backstop to prevent “outsized reductions” that could disrupt markets and expect “agency MBS holdings would still make up a sizable share of the Federal Reserve’s asset holdings for many years.” Therefore, “Participants generally agreed that after balance sheet runoff was well under way, it will be appropriate to consider sales of agency MBS to enable suitable progress toward a longer-run SOMA portfolio composed primarily of Treasury securities. A Committee decision to implement a program of agency MBS sales would be announced well in advance.”


Longer Yields Extend Post-Brainard Climb As Minutes Lay Out Aggressive Balance Sheet Plans: Stocks closed sharply lower Wednesday and longer Treasury yields extended their climb as investors continued to calibrate expectations for more aggressive Fed actions over the remainder of the year. Tech stocks continued to suffer the most severe losses, evidenced by the Nasdaq’s 2.2% decline and related names leading losses in a mixed session for S&P 500 sectors. The broader index closed down 1.0% while the Dow slipped around 0.4%. The 10-year yield rocketed higher Tuesday after Fed Governor Brainard surprised markets with her hawkish outlook for the path of monetary policy. Brainard, considered a centrist on the Committee if not an outright dove, said “it is of paramount importance to get inflation down” and that the Fed will continue raising rates and soon begin shrinking its balance sheet at a “considerably more rapid” pace than in the previous normalization cycle. Her comments stole some of the thunder that was expected to reverberate out of Wednesday’s Fed Minutes and sent the 10-year Treasury yield to its single biggest daily gain since 2013, save the volatility from March 2020 and the day after the 2016 Presidential Election. The benchmark yield rose further Wednesday after the Minutes elaborated on her broader message (more above), adding another 5.1 bps to end at 2.60%, its highest close since March 2019. Although the Minutes also showed growing support for 50-bp rate hikes, fed funds futures were little changed on the day as markets had previously priced in the higher probability of a larger move. The 2-year yield declined 4.2 bps to finish at 2.47%, widening the spread between it and the 10-year yield to more than 12 bps, a seven-day high.

The uproar in the rates market calmed down overnight Thursday and equity futures stabilized ahead of the latest report on jobless claims in the U.S. Stocks slipped in Asia after yesterday’s slump on Wall Street but European stocks managed modest daily gains. U.S. equity index futures were mixed and hovering around unchanged before 7:30 a.m. CT. Yesterday’s moves in the bond market and the heavy focus of market-related news headlines on the Fed’s Minutes drowned out a sizeable drop in global crude prices on Wednesday. U.S. WTI fell more than 5% yesterday after the International Energy Agency announced a coordinated global release of 120 million barrels of crude from reserve stockpiles, including in that figure 60 million barrels of the 180 million barrels the Biden administration previously said it would release from the SPR. U.S. WTI recovered nearly 2% early Thursday to around $98 per barrel. The Treasury curve steepened for a fourth consecutive session as longer yields rose further and shorter yields continued to trim their historic rise. Reflecting comparatively modest moves, the 2-year yield was 1.6 bps lower to 2.45% following the noisy jobless claims report while the 10-year yield rose 1.7 bps to 2.62%.

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