The Market Today

FOMC Minutes Show Fed Ready to Move Faster If Inflation Doesn’t Moderate

by Craig Dismuke, Dudley Carter


Mixed Claims Data Still Show Low Levels of Unemployment: Initial jobless claims rose 23k on a seasonally adjusted basis to 248k in the week ended February 12, disappointing expectations for a fourth weekly decline after rising earlier this year during the Omicron wave. On a non-seasonally adjusted basis, new claims rose 8k with a majority of states reporting higher week-over-week claims. While the increase in new claims was discouraging and disrupted recent improvement, non-seasonally adjusted claims of 238k marks the third lowest level since March 2020. Continuing claims fell more than expected from 1.62mm to 1.59mm in the week ended February 5, the second lowest level since 1973.

Mixed Construction Data: Housing starts disappointed expectations falling 4.1% in January on a 5.6% decline in single family activity. Multi-family starts also dropped, but by a smaller 0.8%. Offsetting the weak starts, new building permits increased another 0.7% in January after climbing 9.8% in December.  New permits were expected to decline 7.2% in January.  Leading the gains was a 6.8% increase in single family.  Multi-family permits fell 8.3%.

Philly Fed Index Dips: The Philadelphia Fed’s February report on regional manufacturing activity fell from 23.2 to 16.0 on broadly weaker readings.  Two exceptions to the weaker results included the readings on number of employees and prices received.  The employment index increased from 26.1 to 32.3, a very solid level.  Like in the Empire Fed Manufacturing index, the prices received index rose, up from 46.4 to 49.8.  This is indicative of manufacturers attempting to push price increases through to customers.

More Fed Communication: We will hear from two voting FOMC members today.  St. Louis Bank President Bullard will speak at 10:00 a.m. CT.  Bullard’s hawkish comments have helped move markets in the aftermath of the hot January inflation report, despite the fact that he is only representing his views.  Also speaking at 4:00 p.m. is Cleveland Bank President Mester.


Surge in Utilities Usage Boosts Industrial Output in January: Total industrial production rose 1.4% last month, easily outpacing the 0.5% gain expected with one of the best months over the last several decades. Manufacturing output inched up 0.2% as expected despite a 0.9% decline in auto output. Excluding auto-related activity, manufacturing output rose 0.3%. Capacity utilization continued to climb, rising from 76.6% to 77.6%, the highest level since March 2019. Mining output rose 1.0% and for a fourth consecutive month. The real boost, however, was provided by the 9.9% surge in utilities usage, the strongest single-month gain on record. Data from NOAA showed temperatures fell below historic averages across much of the country in January after an unseasonably warm December. Electricity output jumped 7.6% while natural gas usage soared 24.2%.

Home Builder Confidence Dips: Home builder confidence slipped in February as higher building and financing costs continued to lean against strong demand. The NAHB’s Housing Market Index fell from 83 to 82 as a softer sales outlook (-2 to an eight-month low) and slower traffic from potential buyers (-4 to match a five-month low) offset an improvement in the current assessment (+1 to match its strongest level since December 2020). The NAHB’s chief economist said, “higher development costs have hit first-time buyers particularly hard,” adding that, “Higher interest rates in 2022 will further reduce housing affordability even as demand remains solid due to a lack of…inventory.” Data released earlier Wednesday morning showed the MBA’s 30-year mortgage rate spiked 22 bps last week to 4.05%, the largest weekly increase since March 2020 and highest rate since July 2019.

January Minutes Show Fed Ready to Move Faster If Inflation Doesn’t Moderate: There were few surprises in the Fed’s January Minutes. When the Fed met in January, officials noted that “elevated inflation was persisting longer than they had anticipated” as a result of economic imbalances and had “broadened beyond sectors most directly affected by those factors.” A lengthy list of risk factors led officials to conclude “risks to inflation were weighted to the upside.” Against that backdrop, officials noted a rate hike was likely soon and most believed “a faster pace of increases” than in the last cycle would be warranted. Notably, if inflation doesn’t moderate, the Minutes said, “it would be appropriate for the Committee to remove policy accommodation at a faster pace than they currently anticipate.” Since the meeting, January’s CPI and PPI reports both came in hotter than expected and a couple of Fed hawks signaled a greater urgency to tighten. As relayed by Chair Powell after the January meeting, there was general support for a faster and more significant runoff of the balance sheet and starting the process later this year. Bottom Line: The Fed was clearly anxious about inflation in January and data since the meeting have shown further strengthening and broadening of inflation. These developments help explain the shift in market expectations from the time of the meeting (four hikes + 25% chance of five) until today (six hikes + 30% chance of seven). The Minutes confirm that inflation data will determine how fast the Fed removes policy accommodation this year.


Markets Dovishly Digest Uninformative Fed Minutes: While the FOMC’s January Minutes included very few surprises and little new information about the pace of rate increases or balance sheet runoff (more above), a turn in markets after their release reflected a broadly dovish interpretation. The S&P 500 steadily reversed an 0.8% decline after the Fed posted the Minutes on its website, closing higher with a modest 0.1% gain. Energy led gains among economically sensitive sectors, with broad improvement excluding only tech-related names. The Dow and Nasdaq fell between 0.1% and 0.2%. Shorter yields were in a decline and near their lows of the day before the Minutes while the 10-year yield had risen marginally and was near session highs. Shorter yields fell further afterwards with the 2-year yield closing 5.7 bps lower at 1.52%. Fed funds futures flattened, reducing the probability of a seventh quarter-point hike this year from 48% to 28% by Wednesday’s close. The 10-year yield drifted down to finished 0.5 bp lower at 2.04%.

Treasury yields pulled back Thursday with U.S. equity futures during a mixed global session as investors monitored conflicting reports about Russia’s troop levels on the border, digested additional corporate earnings reports, and awaited the most recent U.S. jobless claims data. U.S. intelligence officials joined NATO in countering Russia’s claim that it had withdrawn some troops from its border with Ukraine, noting instead that Russia had actually increased its military presence at the pressure points. Oil prices, nevertheless, fell around 1% ahead of U.S. trading. It was a busy day for corporate earnings in Europe, where the Stoxx 600 inched up 0.1% amid mixed changes across countries, and Walmart reported results that topped expectations. While the company’s shares rose more than 2% in pre-market trading, U.S. index futures were down by around 0.5% on average. Consistent with trends in Europe, the Treasury curve was flattening lower ahead of the jobless claims report, pulling the 2-year yield down 1.3 bps to 1.51% and the 10-year yield 3.7 bps lower to 2.00%.

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