The Market Today

Powell Turns Hawk; Economy Expands 6.9% in 4Q

by Craig Dismuke, Dudley Carter


Economy Expands 6.9% in 4Q on Rebound in Inventories: The economy expanded 6.9% QoQ, SAAR in the 4th quarter on a significant boost from the turnaround in inventories and despite inflation dragging 6.9% from the nominal results.  The economy is now 3.1% larger than prior to the pandemic. Personal consumption rose 3.3% on a 4.7% gain in services spending and a smaller 0.5% increase in goods.  The rebound in goods spending would have been even stronger absent another 6.6% decrease in spending on motor vehicle and parts.  Residential investment dragged on growth for the third consecutive quarter, but was only down 0.8% in 4Q.  Business investment excluding inventories rose 2.0% on mixed results: spending on equipment stayed elevated but only grew 0.8%, investment in intellectual property jumped another 10.6%, and investment in structures fell another 11.4%.  Government spending fell 2.9% on declines at both the federal and state and local levels.  Combined, government spending dragged 0.5% from the GDP tally.  External trade proved to be a neutral factor. The biggest factor driving 4Q growth was the turnaround in inventories.  Despite the supply chain remaining impaired, inventories rebounded $173b ann. and boosted the final GDP total 4.9%.  Going forward, the inventory rebuild was expected to be a tailwind to growth in 2022 but much of that has now been pulled forward into 4Q21, thereby reducing the outlook for 2022.

New Jobless Claims Post First Decline in Four Weeks: Seasonally adjusted initial jobless claims declined by more than expected and for the first time in four weeks. Total claims fell 30k from 290k to 260k in the week ending January 22, better than the 265k claims expected but still well above the 218k average from the final two months of 2021. In a normal seasonal pattern, claims tend to rise late in a year and into early January before pulling back. Omicron’s spread and unusually large non-seasonally adjusted increases indicated the latest wave of the pandemic may have also had an effect. On a non-seasonally adjusted basis, new jobless claims fell 73k to 268k and have dropped 153k from the 421K posted in the first week of the year. Every state except for Alabama and Alaska reported fewer claims. Seasonally adjusted continuing claims for the week ending January 15 disappointed expectation, rising from 1.624mm to 1.675mm, a three-week high.

Pending Home Sales, Apple Earnings: December’s pending home sales report is expected to show a 4.0% contraction at 9:00 a.m. CT.  At 10:00 a.m., the Kansas City Fed’s regional report on manufacturing activity in January is expected to slip but remain strong. Apple is scheduled to report earnings after the close.


No Surprises in the Fed’s Statement: The FOMC voted to keep its overnight target rate range unchanged at 0.00-0.25% and stick with its previously announced plan for tapering asset purchases, “bringing them to an end in early March.” Notably and as expected, they provided a strong signal that they plan to raise rates when they reconvene in mid-March. The Statement was amended to note that in response to inflation “well above 2 percent” and “a strong labor market,” officials now believe “it will soon be appropriate to raise the target range for the federal funds rate.” The new language is in line with recent public comments from a host of officials that showed a growing consensus for a March hike. In addition to signaling a rate hike, the Fed released a separate document, Principles for Reducing the Size of the Federal Reserve’s Balance Sheet, that described the “foundation” for their ongoing discussions about balance sheet normalization, according to Fed Chair Powell. Officials expect to begin reducing the size of their balance sheet “in a predictable manner primarily by adjusting the amounts reinvested” sometime “after the process of increasing the target range…has begun.”

Powell’s Clearly Hawkish Tone Surprises: While markets took the new Statement in stride, equities reversed lower and Treasury yields soared during Chair Powell’s press conference. The Chair said several times that no decisions on the pace of tightening, either by increases to the target fed funds range or normalizing the balance sheet, were made at today’s meeting and that incoming data would inform policy decisions after initial liftoff in March. However, he also stressed as much or more that risks to inflation remain to the upside, that the labor market is very strong, and that growth is projected to continue at an above-potential pace despite headwinds. Those factors indicate that the economy is in a much different place than it was during the prior tightening cycle which began in 2015 and resulted in hikes at every other meeting. “These differences are likely to have important implications for the appropriate pace of policy adjustments,” Powell said.

New Home Sales Surprise to the Upside: New home sales rose more than expected in December, rising 11.9% to a nine-month high of 811k annualized units. The results topped expectations for a 2.2% gain to 760k units and followed an 11.7% increase in November. On the whole, the prior three months’ sales were revised down 30k. Activity rose in three of the four geographic regions with particular strength in the Midwest (+56%) and South (+14.9%). Sales of completed homes continued to account for an unusually low share of total transactions as sales of homes not started or under construction remained elevated. Months supply fell from 6.6 to 6.0, a seven-month low, despite inventory levels inching up to 403k units, notably above the 325k in stock in February 2020 and the highest since July 2008. The number of those homes that were completed, however, inched up to 39k, representing a 49% decline from pre-pandemic levels. Sales of new homes slowed from 2020’s scorching pace of 821k, the best year since 2006, to 763k, the second best year since 2007. Data last week showed the strongest year for existing home sales since 2006.


Surprisingly Hawkish Powell Spoils Equity Rally, Sends Yields Soaring: U.S. equities rose steadily during morning trading and Treasury yields ticked modestly higher moving towards the Fed’s decision. The seemingly calm and confident tone had pushed the S&P 500 up 1.5% immediately before the Fed announced its decision. The 2-year yield had risen 1.2 bps to 1.03% and the 10-year yield was 0.4 bps higher at 1.77%. The knee-jerk reaction to the initial headlines pushed stocks up to session highs and nudged yields slightly higher. The statement’s signal for a March hike was expected and a possible surprise move to end asset purchases early didn’t occur (more above). The benign market response, however, began to intensify as Fed Chair Powell hawkishly implied a potentially more aggressive path for tightening than was projected last December (more above). The S&P 500 slumped into negative territory and closed 0.2% lower. The Dow fell 0.4% while the Nasdaq erased a 3.4% gain to end unchanged. Treasury yields rose rapidly and the curve flattened as fed funds futures repriced higher in yield to reflect four hikes in 2022 with a more-than-insignificant chance of a fifth. The 2-year and 3-year yields soared more than 13 bps to 1.15% and 1.40%, respectively, and the 5-year yield added 12.9 bps to 1.68%, all three closing at new cycle highs. The 10-year yield rose 9.5 bps to 1.86%, ending within 1 bp of its cycle high of 1.875% from last week.

Treasury Curve Continues to Flatten: Treasury yields have continued to flatten overnight ahead of this morning’s advance GDP estimate for the fourth quarter and the latest reading on jobless claims. Just prior to the data releases, the 2-year yield had added another 3.4 bps to yesterday’s surge, trading at a new cycle high of 1.18%. The 5-year yield, however, edged 0.3 bps lower to 1.68% and the 10-year yield fell 3.2 bps to 1.83%. The spread between the 2-year and 10-year yields tightened by more than 6 bps, the sharpest flattening since December, to 64 bps, the lowest since November 2020. The curve has flattened in six of the last seven trading days from more than 83 bps and in 13 of the 19 trading days this year. U.S. equity futures were stronger and being led by a 0.7% gain for the Nasdaq. Tesla’s earnings report after markets closed Wednesday was generally stronger than expected and Apple is set to report after today’s session. Stocks sold off sharply in Asia following Wednesday’s post-Fed decline in the U.S. while Europe’s Stoxx 600 inched 0.2% higher. Oil prices have continued to rise and reached new seven-year highs overnight. U.S. WTI traded up close to $88 per barrel, the highest level since October 2014. Treasury yields mostly held their levels after the morning economic reports.

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