The Market Today

More Evidence of Price Pressures as FOMC Begins Two-Day Meeting


by Craig Dismuke, Dudley Carter

TODAY’S CALENDAR

Small Businesses Broadly Raising Prices: Small business confidence inched up from 98.2 to 98.4 in November, remaining depressed relative to pre-Covid levels.  According to NFIB Chief Economist Bill Dunkelberg, “the outlook for business conditions is not encouraging to small business owners as lawmakers propose additional mandates and tax increases.” The net percent of respondents expecting the economy to improve declined another point to -38%. Small businesses are still struggling to hire workers with 48% saying they had job openings which could not be filled in November.  Dunkelberg also noted, “Owners are also pessimistic as many continue managing challenges like rampant inflation and supply chain disruptions”.  The net percent of respondents raising prices increased to +59%, the highest level since 1979.  The net percent of respondents planning future price increases rose to +54%, its highest level on record (going back 48 years).

Producer Price Inflation Hotter-Than-Expected: The November producer price index proved to be yet another hotter-than-expected reading on inflation pressures.  PPI rose 0.8% MoM in November bringing the headline YoY rate up from 8.8% to 9.6%, its highest level since calculation changes in 2011. Like in the CPI report, energy prices rose a brisk 2.6% MoM while food prices rose 1.2%.  Excluding food and energy items, core prices rose 0.7% MoM (exp. +0.4%) bringing the YoY rate up from 7.0% to 7.7%.  Producer price inflation was hotter than the 12-month run rates on both the goods and services sides.

FOMC Begins Two-Day Meeting: The Fed begins its two-day policy meeting today, concluding tomorrow with a Policy Statement and a revised Summary of Economic Projections. They are expected to double the pace of tapering from $15 billion per month to $30 billion.  Mohamed El-Erian suggested yesterday in a Bloomberg article that “the Fed should go well beyond that” because the “inflation process is stronger and more persistent than the Fed thought.”  If they double the pace, balance sheet growth would conclude by March, bringing the option for hiking rates forward.  Investors, evidenced by Fed Funds futures contracts, are now debating the likelihood of a hike as early as May 2022.  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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Governments and businesses around the world continued to respond to signs Omicron could accelerate a rise in cases initially spurred by the Delta variant. California will reportedly reintroduce an indoor mask mandate starting Wednesday and Norway banned the sale of alcohol in bars and restaurants. Even China reported a single case of Omicron. Although evidence indicates the new Omicron variant may not be more severe than other strains, the U.K. health secretary said the government is expecting a dramatic increase in hospitalizations. Scotiabank and Fidelity paused some of their return-to-office plans. The U.S. Supreme Court left a New York vaccine mandate for health care workers in place.


TRADING ACTVITY

Curve Flattening Resumed as Stocks Recoiled from Records: Stocks sold off steadily Monday morning and made another move down in the final minutes to close at session lows. The S&P 500 slipped 0.9% from last Friday’s record high, similar in size to the Dow’s pullback but less severe than the Nasdaq’s 1.4% decline. Safer sectors managed gains while cyclical sectors, reopening plays, and technology all posted losses. The risk-off sentiment extended a decline for longer Treasury yields from the second half of last week, pushing the 10-year yield back towards the bottom of a more than two-month trading range. The 10-year yield sank 6.8 bps to 1.42%, back below its 200-day moving average, while the 2-year yield edged 2.2 bps lower to 0.63%. The moves unwound a portion of large increases last week that were spurred by growing optimism omicron may not produce more severe health outcomes. Monday’s changes flattened the spread between the 2-year and 10-year yields to 77.9 bps ahead of Wednesday’s Fed decision, its third lowest level of 2021. Curve flattening has been intense over the last two months on signs the Fed and other central banks are pivoting towards more hawkish policy settings amid strong inflation.

Appetite for global equities remained suppressed overnight as investors await key central bank decisions later in the week. Stocks mostly declined across Asia and Europe quickly pared a stronger opening gain and was back near unchanged. Futures tracking the Dow and S&P 500 were mixed but little changed while the Nasdaq slipped 0.4% around 6:45 a.m. CT. Prior to this morning’s PPI inflation report, Treasury yields recovered a portion of yesterday’s pullback. The 2-year yield was up 1.6 bps to 0.65% and the 5-year yield had added 2.1 bps to 1.23%. The 10-year yield was 1.5 bps higher at 1.43%. Despite the firmer than expected PPI report, yields inched down from those levels at 7:37 a.m. CT.


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