The Market Today
Russian Angst Eases for the Morning; Bullard Affirms Hawkish View
by Craig Dismuke, Dudley Carter
St Louis Fed Bank President Bullard Affirms Preference to Front-Load Tightening: St. Louis Bank President Bullard appeared on CNBC this morning reaffirming his position that the Fed should hike 100 bps by July 1. There are only three scheduled FOMC meetings by July 1 implying either 1) a 50 bps hike or 2) an intra-meeting hike. In addition, he would like to see passive balance sheet runoff in 2Q and hopes the balance sheet effort leads to a steeper yield curve. Bullard wants to effectively front-load the tightening cycle at the time of liftoff, something the market appears tolerant of, in order to bolster the Fed’s credibility as inflation fighters. Also notable, he indicated these were his opinions and he was trying to convince other Fed members of these views.
OTHER ECONOMIC NEWS
ICYMI – February 11, 2022 Weekly Market Recap: Not surprisingly, Treasury yields were little changed after the first three days of last week, caught in a lull between the prior week’s central bank decisions and U.S. payroll report and the highly anticipated CPI inflation data. Early data was relatively uneventful. Small business confidence declined more than expected in January to an 11-month low as inflation concerns continued to grow. Consumer credit growth slowed in December after a strong November jump. Trade data was better than expected in November and December. A couple of Treasury auctions went off strongly, showing multi-year high yields have attracted investor demand. And a hawkish Fed voter dismissed the need for a 50-bp hike. The tone, however, changed sharply and abruptly early Thursday morning. January’s CPI report was hotter than forecast and reflected broad upward pressure across most sectors. Shorter Treasury yields led a rapid increase across the curve, moves that intensified after Fed President Bullard, a known hawk and 2022 voter, responded with a call for the fed funds rate to be 1.00% higher by July 1 and noted the Fed needed to be nimble, including considering the possibility of raising rates between meetings. The 2-year yield rose 21.5 bps on Thursday alone, its largest leap since June 2009. Markets adjusted rapidly to the developments with futures pricing in a greater-than-50% chance of seven quarter-point hikes this year and an 80% chance of a 50-bp move in March. The 10-year yield crossed above 2.00% for the first time since August 2019. While still higher for the week, yields pared their gains Friday morning, particularly on the longer end, following reports the U.S. believes that Russia could invade Ukraine this week. Oil spiked with gold and stocks fell and the likelihood of a seventh hike declined to around 20%. Click here to view the full recap.
Market Remains Anxious About Russia-Ukraine Situation Complicating Market Outlook Amid Fast Inflation and Aggressive Fed Signals: The continued threat of military conflict in Ukraine pressured global equities lower overnight. Weekend news coverage honed in on comments from U.S. military officials reiterating that a Russian invasion of Ukraine remains a real threat this week. Tracking steep declines for U.S. equities late Friday on anxiety about the Russia-Ukraine situation, Asian stocks dumped 1.4% and Europe’s Stoxx 600 fell more than 1.7%. European yields retreated amid the uncertainty, dragging most curves in the region down by more than 4 bps in somewhat parallel fashion. Treasury yields and U.S. equity futures also fell earlier in the global session but have pared those declines ahead of U.S. trading. Oil prices were lower on the day after initially climbing to new highs since 2014. The reversals were loosely aligned with headlines covering comments from Russia’s foreign minister encouraging a continuation of diplomatic talks between his country and the west. Stock index futures were hovering just below unchanged at 7:15 a.m. CT, up from earlier lows of more than 1%. The 2-year Treasury yield was 6.0 bps higher at 1.56% as the 10-year yield rose 2.8 bps to 1.97%, both holding below their highest levels from last week but continuing the recent flattening trend. The 2-year, 10-year Treasury spread fell to 40 bps, a new low since August 2020. A hot CPI inflation report last week and subsequent hawkish comments from a Fed official spurred a yield surge on Thursday that pushed the curve to its highest level since before the pandemic (more above).